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The Distributional Impact of Public Services When Needs Differ

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  • Aaberge, Rolf

    (Statistics Norway)

  • Bhuller, Manudeep

    (University of Oslo)

  • Langørgen, Audun

    (Statistics Norway)

  • Mogstad, Magne

    (University of Chicago)

Abstract

Despite a broad consensus on the need to take into account the value of public services in distributional analysis, there is little reliable evidence on how the inclusion of such non-cash income actually affects poverty and inequality estimates. In particular, the equivalence scales applied to cash income are not necessarily appropriate when including non-cash income, because the receipt of public services is likely to be associated with particular needs. In this paper, we propose a theory-based framework designed to provide a coherent evaluation of the distributional impact of local public services. The valuation of public services, identification of target groups, allocation of expenditures to target groups, and adjustment for differences in needs are derived from a model of local government spending behaviour. Using Norwegian data from municipal accounts and administrative registers we find that the inclusion of non-cash income reduces income inequality by about 15 percent and poverty rates by almost one-third. However, adjusting for differences in needs for public services across population subgroups offsets about half the inequality reduction and some of the poverty decrease.

Suggested Citation

  • Aaberge, Rolf & Bhuller, Manudeep & Langørgen, Audun & Mogstad, Magne, 2010. "The Distributional Impact of Public Services When Needs Differ," IZA Discussion Papers 4826, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp4826
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    References listed on IDEAS

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    More about this item

    Keywords

    needs adjustment; income distribution; poverty; public services; non-cash income; equivalence scales;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General

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