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A Pareto Efficiency Rationale for the Welfare State

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  • Napel, Stefan

Abstract

Can fiscal policy raise utility for all in dynamic economies with unobservable agent heterogeneity, when missing credit and insurance markets affect incentives to invest in human capital? If so, should the state provide transfers to the poor in the form of cash or in kind? In an occupational choice model, we show (a) every competitive equilib- rium is interim-Pareto dominated by a policy providing education subsidies financed by income taxes, and (b) transfers conditional on educational investments similarly dom- inate unconditional transfers. The policies also result in macroeconomic improvements (higher per capita income and upward mobility, lower wage dispersion).

Suggested Citation

  • Napel, Stefan, 2014. "A Pareto Efficiency Rationale for the Welfare State," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100496, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc14:100496
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    More about this item

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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