Should transfer payments be indexed to local price levels?
AbstractThis paper examines the optimal location-based redistribution policy and shows that adjustment for local price levels is occasionally optimal, but never for the reasons suggested by the popular press. First, the existence of a spatial equilibrium suggests that utility levels will be equalized across space, so there is little equity rationale for indexing transfers to local prices. Second, since transfers to high cost areas buy less than transfers to low cost areas, it is in fact less efficient to transfer to high cost areas. However, even though migration ensures that utilities are equalized across space, marginal utilities of income will not necessarily be equalized, and since optimal transfer policy equalizes marginal,not total, utilities there is possibly a rationale for indexing to local pricelevels. Optimal indexing is a function of the coefficient of relative risk aversion, the elasticity of migration with respect to transfer differences across space and the degree to which higher amenities in high cost areas increase or decrease the marginal utility of income. Given my best parameter estimates, a one percent increase in local prices should lead to a .5 percent increase in transfers, when transfers are 2/3 of total income. My estimates from current AFDC payments suggest that the current level of implicit indexing is too high to possibly be optimal.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Regional Science and Urban Economics.
Volume (Year): 28 (1998)
Issue (Month): 1 (January)
Contact details of provider:
Web page: http://www.elsevier.com/locate/regec
Other versions of this item:
- Edward L. Glaeser, 1996. "Should Transfer Payments Be Indexed to Local Price Levels?," NBER Working Papers 5598, National Bureau of Economic Research, Inc.
- H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
- R50 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - General
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Martin Feldstein & Marian Vaillant, 1994.
"Can State Taxes Redistribute Income?,"
NBER Working Papers
4785, National Bureau of Economic Research, Inc.
- Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-65, April.
- Rauch James E., 1993.
"Productivity Gains from Geographic Concentration of Human Capital: Evidence from the Cities,"
Journal of Urban Economics,
Elsevier, vol. 34(3), pages 380-400, November.
- James E. Rauch, 1991. "Productivity Gains From Geographic Concentration of human Capital: Evidence From the Cities," NBER Working Papers 3905, National Bureau of Economic Research, Inc.
- Edward L. Glaeser & David C. Mare, 1994.
"Cities and Skills,"
NBER Working Papers
4728, National Bureau of Economic Research, Inc.
- repec:fth:stanho:e-94-11 is not listed on IDEAS
- Edward M. Gramlich & Deborah S. Laren, 1984. "Migration and Income Redistribution Responsibilities," Journal of Human Resources, University of Wisconsin Press, vol. 19(4), pages 489-511.
- Olivier Jean Blanchard & Lawrence F. Katz, 1992. "Regional Evolutions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1), pages 1-76.
- Roback, Jennifer, 1982. "Wages, Rents, and the Quality of Life," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1257-78, December.
- Blank, Rebecca M., 1988. "The effect of welfare and wage levels on the location decisions of female-headed households," Journal of Urban Economics, Elsevier, vol. 24(2), pages 186-211, September.
- Wildasin, David E, 1991. "Income Redistribution in a Common Labor Market," American Economic Review, American Economic Association, vol. 81(4), pages 757-74, September.
- J. R. Walker, . "Migration amoung low-income households: Helping the witch doctors reach consensus," Institute for Research on Poverty Discussion Papers 1031-94, University of Wisconsin Institute for Research on Poverty.
- Feldstein, Martin & Wrobel, Marian Vaillant, 1994. "Can State Taxes Redistribute Income?," Scholarly Articles 2799054, Harvard University Department of Economics.
- R. Mehra & E. Prescott, 2010.
"The equity premium: a puzzle,"
Levine's Working Paper Archive
1401, David K. Levine.
- John H. Cochrane & Lars Peter Hansen, 1992.
"Asset Pricing Explorations for Macroeconomics,"
in: NBER Macroeconomics Annual 1992, Volume 7, pages 115-182
National Bureau of Economic Research, Inc.
- Robert B. Barsky & Miles S. Kimball & F. Thomas Juster & Matthew D. Shapiro, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Survey," NBER Working Papers 5213, National Bureau of Economic Research, Inc.
- Brown, Charles C. & Oates, Wallace E., 1987.
"Assistance to the poor in a federal system,"
Journal of Public Economics,
Elsevier, vol. 32(3), pages 307-330, April.
- Moffitt, Robert, 1992. "Incentive Effects of the U.S. Welfare System: A Review," Journal of Economic Literature, American Economic Association, vol. 30(1), pages 1-61, March.
- repec:fth:coluec:9596-18 is not listed on IDEAS
- Louis Kaplow, 1997. "Regional Cost-of-Living Adjustments in Tax-Transfer Schemes," NBER Working Papers 5008, National Bureau of Economic Research, Inc.
- David Albouy, 2010.
"Evaluating the Efficiency and Equity of Federal Fiscal Equalization,"
NBER Working Papers
16144, National Bureau of Economic Research, Inc.
- Albouy, David, 2012. "Evaluating the efficiency and equity of federal fiscal equalization," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 824-839.
- Esteller-Moré, Alejandro & Rizzo, Leonzio, 2011.
"(Uncontrolled) Aggregate Shocks Or Vertical Tax Interdependence? Evidence From Gasoline And Cigarettes,"
National Tax Journal,
National Tax Association, vol. 64(2), pages 353-79, June Cita.
- Alejandro Esteller-More (Universitat de Barcelona) & Leonzio Rizzo (Universita di Ferrara), 2009. "(Uncontrolled) Aggregate shocks or vertical tax interdependence? Evidende from gasoline and cigarettes," Working Papers in Economics 233, Universitat de Barcelona. Espai de Recerca en Economia.
- Alejandro Esteller-Moré & Leonzio Rizzo, 2009. "(Uncontrolled) Aggregate shocks or vertical tax interdependence? Evidence from gasoline and cigarettes," Working Papers 2009/24, Institut d'Economia de Barcelona (IEB).
- Black, Duncan, 1999. "Local Knowledge Spillovers and Inequality," ERSA conference papers ersa99pa409, European Regional Science Association.
- repec:fth:prinin:423 is not listed on IDEAS
- David Albouy, 2009.
"The Unequal Geographic Burden of Federal Taxation,"
Journal of Political Economy,
University of Chicago Press, vol. 117(4), pages 635-667, 08.
- Edward L. Glaeser & Joshua D. Gottlieb, 2009.
"The Wealth of Cities: Agglomeration Economies and Spatial Equilibrium in the United States,"
Journal of Economic Literature,
American Economic Association, vol. 47(4), pages 983-1028, December.
- Edward L. Glaeser & Joshua D. Gottlieb, 2009. "The Wealth of Cities: Agglomeration Economies and Spatial Equilibrium in the United States," NBER Working Papers 14806, National Bureau of Economic Research, Inc.
- Moretti, Enrico, 2010.
"Local Labor Markets,"
IZA Discussion Papers
4905, Institute for the Study of Labor (IZA).
- Tanguay, Georges & Hunt, Gary & Marceau, Nicolas, 2002. "Using a Canadian-American Natural Experiment to Study Relative Efficiencies of Social Welfare Payment Systems," Cahiers de recherche 0205, CIRPEE.
- Georges Tanguay & Gary Hunt & Nicolas Marceau, 2005. "Food Prices and the Timing of Welfare Payments: A Canadian Study," Canadian Public Policy, University of Toronto Press, vol. 31(2), pages 145-160, June.
- Albert Solé-Ollé & Elisabet Viladecans-Marsal, . "Cities as engines of regional growth," Studies on the Spanish Economy 145, FEDEA.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If references are entirely missing, you can add them using this form.