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Transfers, Social Safety Nets, and Economic Growth

  • Xavier Sala-I-Martin

    (International Monetary Fund)

This paper analyzes the role of social safety nets in the form of redistributional transfers and wage subsidies. It argues that public welfare programs can be viewed as devices to prevent crime or disruption because they tend to increase the opportunity cost of engaging in crime or disruptive activities. It is shown that, in the presence of a leisure choice, wage subsidies may be better than pure transfers. Using a simple growth model, the optimal size of the public welfare program is found, and it is argued that public welfare should be financed with income (not lump-sum) taxes, despite the fact that income taxes are distortionary. The intuition for this result is that income taxes act as a user fee on congested public goods and transfers can be thought of as productive public goods subject to congestion.

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Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

Volume (Year): 44 (1997)
Issue (Month): 1 (March)
Pages: 81-102

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Handle: RePEc:pal:imfstp:v:44:y:1997:i:1:p:81-102
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