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The Redistributive Effects of Transfers

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  • Keshab Bhattarai
  • John Whalley

Abstract

Existing literature assessing the impacts of transfers on low income households assumes that transfer program participants benefit by the full amount of cash transfers received. We argue that because tax-back arrangements accompany such transfer programmes, and endogenous participantion decisions (regime choices) are involved, a money-metric measure of the utility generated by transfers will typically be substantially less than the cash value of transfers received. We use a conditional choice general equilibrium model of the UK, calibrated to literature based labor supply and labor demand elasticities, with a leisure-consumption choice for household and production involving heterogeneous labor inputs. In the model households face non-convex budgets set due to differences in tax rates and tax-back schemes in transfer programmes. Household demands for leisure and consumption goods are evaluated numerically using optimization techniques within a larger equilibrium structure including the production side of the economy since demand are non-analytic. Model results suggest that a money-metric measure of the utility equivalent of transfers received by the bottom deciles of UK households in the early 1990s was only 32 percent of cash transfers received due to the conditionality in these programmes.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6281.

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Date of creation: Nov 1997
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Handle: RePEc:nbr:nberwo:6281

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  1. Hoynes, Hilary Williamson, 1996. "Welfare Transfers in Two-Parent Families: Labor Supply and Welfare Participation under AFDC-UP," Econometrica, Econometric Society, Econometric Society, vol. 64(2), pages 295-332, March.
  2. Shoven,John B. & Whalley,John, 1992. "Applying General Equilibrium," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521319867.
  3. Heckman, James J, 1974. "Shadow Prices, Market Wages, and Labor Supply," Econometrica, Econometric Society, Econometric Society, vol. 42(4), pages 679-94, July.
  4. Browning, Edgar K, 1973. "Alternative Programs for Income Redistribution: The NIT and the NWT," American Economic Review, American Economic Association, American Economic Association, vol. 63(1), pages 38-49, March.
  5. Moffitt, Robert, 1992. "Incentive Effects of the U.S. Welfare System: A Review," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 30(1), pages 1-61, March.
  6. Andrew Dilnot & Alan Duncan, 1992. "Lone mothers, family credit and paid work," Fiscal Studies, Institute for Fiscal Studies, Institute for Fiscal Studies, vol. 13(1), pages 1-21, February.
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