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Transfers, social safety nets and economic growth

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Abstract

The role of social safety nets in the form of redistributional transfers and wage subsidies is analyzed using a simple model of criminal behavior. It is argued that public welfare programs act as a crime--preventing or disruption--preventing devices 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, it is shown that it is not optimal for the government to try to fully eliminate crime. 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 {\it productive} public goods {\it subject to congestion}. Finally, using a cross-section of 75 countries, the partial correlation between transfers and growth is shown to be significantly positive.

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  • Xavier Sala-i-Martin, 1995. "Transfers, social safety nets and economic growth," Economics Working Papers 139, Department of Economics and Business, Universitat Pompeu Fabra.
  • Handle: RePEc:upf:upfgen:139
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    JEL classification:

    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration

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