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Social Transfers and Spatial Distortions

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Abstract

US social transfer programs vary substantially across states, incentivizing households to locate in states with more generous transfer programs. Further, transfer formulas often decrease in income, therefore rewarding low-income households for living in low-paying cities. We quantify these distortions by combining a spatial equilibrium model with a detailed model of transfer programs in the US. The current system leads to locational inefficiency of 4.38% of total transfer spending. A reform that both harmonizes transfer policies across states and indexes household income to local average earnings reduces this inefficiency by over 85 percent while still preserving the programs' means-tested nature.

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  • Mark Colas & Robert McDonough, 2021. "Social Transfers and Spatial Distortions," Opportunity and Inclusive Growth Institute Working Papers 54, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmoi:93474
    DOI: 10.21034/iwp.54
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    More about this item

    Keywords

    Social transfers; Local labor markets; Spatial equilibrium;
    All these keywords.

    JEL classification:

    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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