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Should transfer payments be indexed to local price levels?

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  • Glaeser, E. L.

Abstract

This paper examines the optimal location-based redistribution policy and shows that adjustment for local price levels is occasionally optimal, but never for the reasons suggested by the popular press. First, the existence of a spatial equilibrium suggests that utility levels will be equalized across space, so there is little equity rationale for indexing transfers to local prices. Second, since transfers to high cost areas buy less than transfers to low cost areas, it is in fact less efficient to transfer to high cost areas. However, even though migration ensures that utilities are equalized across space, marginal utilities of income will not necessarily be equalized, and since optimal transfer policy equalizes marginal,not total, utilities there is possibly a rationale for indexing to local pricelevels. Optimal indexing is a function of the coefficient of relative risk aversion, the elasticity of migration with respect to transfer differences across space and the degree to which higher amenities in high cost areas increase or decrease the marginal utility of income. Given my best parameter estimates, a one percent increase in local prices should lead to a .5 percent increase in transfers, when transfers are 2/3 of total income. My estimates from current AFDC payments suggest that the current level of implicit indexing is too high to possibly be optimal.
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Suggested Citation

  • Glaeser, E. L., 1998. "Should transfer payments be indexed to local price levels?," Regional Science and Urban Economics, Elsevier, vol. 28(1), pages 1-20, January.
  • Handle: RePEc:eee:regeco:v:28:y:1998:i:1:p:1-20
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    Cited by:

    1. Albouy, David, 2012. "Evaluating the efficiency and equity of federal fiscal equalization," Journal of Public Economics, Elsevier, vol. 96(9-10), pages 824-839.
    2. repec:spr:anresc:v:58:y:2017:i:3:d:10.1007_s00168-017-0813-x is not listed on IDEAS
    3. Black, Duncan, 1999. "Local Knowledge Spillovers and Inequality," ERSA conference papers ersa99pa409, European Regional Science Association.
    4. Dumond, J Michael & Hirsch, Barry T & Macpherson, David A, 1999. "Wage Differentials across Labor Markets and Workers: Does Cost of Living Matter?," Economic Inquiry, Western Economic Association International, vol. 37(4), pages 577-598, October.
    5. Esteller-Moré, Alejandro & Rizzo, Leonzio, 2011. "(Uncontrolled) Aggregate Shocks or Vertical Tax Interdependence? Evidence From Gasoline and Cigarettes," National Tax Journal, National Tax Association, pages 353-379.
    6. Moretti, Enrico, 2011. "Local Labor Markets," Handbook of Labor Economics, Elsevier.
    7. Tanguay, Georges & Hunt, Gary & Marceau, Nicolas, 2002. "Using a Canadian-American Natural Experiment to Study Relative Efficiencies of Social Welfare Payment Systems," Cahiers de recherche 0205, CIRPEE.
    8. Jan Eeckhout & Nezih Guner, 2014. "Optimal Spatial Taxation: Are Big Cities too Small?," Working Papers 804, Barcelona Graduate School of Economics.
    9. Edward L. Glaeser & Joshua D. Gottlieb, 2009. "The Wealth of Cities: Agglomeration Economies and Spatial Equilibrium in the United States," Journal of Economic Literature, American Economic Association, vol. 47(4), pages 983-1028, December.
    10. Lucie Schmidt & Paul N. Courant, 2006. "Sometimes Close Is Good Enough: The Value Of Nearby Environmental Amenities," Journal of Regional Science, Wiley Blackwell, vol. 46(5), pages 931-951.
    11. Georges Tanguay & Gary Hunt & Nicolas Marceau, 2005. "Food Prices and the Timing of Welfare Payments: A Canadian Study," Canadian Public Policy, University of Toronto Press, vol. 31(2), pages 145-160, June.
    12. Albert SolÈ-OllÈ & Elisabet Viladecans-Marsal, "undated". "Cities as engines of regional growth," Studies on the Spanish Economy 145, FEDEA.
    13. David Albouy, 2009. "The Unequal Geographic Burden of Federal Taxation," Journal of Political Economy, University of Chicago Press, vol. 117(4), pages 635-667, August.
    14. Giovanni D'Alessio, 2017. "Well-being, the socio-economic context and price differences: the North-South gap," Questioni di Economia e Finanza (Occasional Papers) 385, Bank of Italy, Economic Research and International Relations Area.

    More about this item

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • R50 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - General

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