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Further evidence of the relationship between social transfers and

Working Paper 2018-482

Abstract

In this paper, we have revised the estimates of the effects of social transfers on income inequality. We have accounted for reverse causality using an instrumental variable derived via a theoretical model, which identifies the main driver of social transfers from the interaction between the electoral system and the coalition or party winning the election, and have estimated, in the OECD countries, that a 1% increase in the share of social transfers reduces income inequality by one-half of a percentage point. This result appears to be robust to different components of expenditure, alternative model specifications and falsification tests. Only countries with a high corruption level appear to violate this empirical regularity. Our estimates show that bureaucratic inefficiencies caused by corruption are responsible for the lack of benefit of social transfers on economic inequality.

Authors: Giorgio d’Agostino, Luca Pieroni, Margherita Scarlato.

Keywords: Welfare policy, social spending, income inequality, instrumental variable estimation.
JEL: H53, I38, C26.