Transfers, Social Safety Nets, and Economic Growth

Xavier Sala-i-Martin

No 1996/040, IMF Working Papers from International Monetary Fund

Abstract: This paper analyses the role of social safety nets in the form of redistributional transfers and wage subsidies. It is argued that public welfare programs can be viewed as a crime-preventing or disruption-preventing devices because they tend to increase the opportunity cost of engaging in crime or disruptive activities. It is shown that, in the presence of a leisure choice, wage subsidies may be better than pure transfers. Using a simple growth model, the optimal size of the public welfare program is found and it is argued that public welfare should be financed with income (not lump-sum) taxes, despite the fact that income taxes are distortionary. The intuition for this result is that income taxes act as a user fee on congested public goods and transfers can be thought of as productive public goods subject to congestion. Finally, using a cross-section of 75 countries, the partial correlation between transfers and growth is shown to be significantly positive.

Keywords: WP; criminal activity; aggregate income; substitution effect; Social Safety Nets; Public Welfare; Economic Growth; Transfers; Productive Public Spending; crime problem; crime-preventing device; government budget constraint; crime-reducing device; crime-reduction device; crimes people; amount of crime; Personal income; Income inequality; Employment subsidies; Consumption; North America; Northern Europe; Europe (search for similar items in EconPapers)
Pages: 31
Date: 1996-04-01
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Citations: View citations in EconPapers (12)

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