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Revisiting the relationship between welfare spending and income inequality in OECD countries

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  • d'Agostino, Giorgio
  • Pieroni, Luca
  • Procidano, Isabella

Abstract

The present paper estimates the effects of welfare interventions on income inequality. We propose a theoretical model showing that welfare policies follow the median voter constituency regardless of whether governments are center-left or center-right in the majority electoral system, whereas large differences exist between center-left and center- right coalitions in the proportional representation system. We exploit these differences in the mechanisms of welfare expenditure to estimate their elasticities on income inequality and find that a 1% increase in government spending reduces the Gini income index by half a percentage point. This result is robust under different compositions of expenditure, alternative imputation model specifications and falsification tests.

Suggested Citation

  • d'Agostino, Giorgio & Pieroni, Luca & Procidano, Isabella, 2016. "Revisiting the relationship between welfare spending and income inequality in OECD countries," MPRA Paper 72020, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:72020
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    Cited by:

    1. Costantini, Mauro & Paradiso, Antonio, 2018. "What do panel data say on inequality and GDP? New evidence at US state-level," Economics Letters, Elsevier, vol. 168(C), pages 115-117.

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    More about this item

    Keywords

    Welfare policies; Electoral rules; Income inequality; Instrumental variable approach; OECD countries;
    All these keywords.

    JEL classification:

    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs

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