Send message to Author
Paper short abstract:
We document (i) a negative relationship between the level of transfer progressivity
and the stage of economic development and (ii) a negative relationship between the ability
to insure consumption against income shocks and economic development.
Paper long abstract:
With micro panel data from 32 countries including the poorest and the richest in the
world we document (i) a negative relationship between the level of transfer progressivity
and the stage of economic development and (ii) a negative relationship between the ability
to insure consumption against income shocks and economic development. Importantly,
our measure of transfer progressivity includes both public and private net transfers across
households—e.g. food transfers. Using an overlapping generations model in which agents
differ in permanent productivity, face income shocks and accumulate physical and human
capital through learning-by-doing (a labor choice), we find that cross-country differences
in transfer progressivity go a long way in explaining the larger ability to insure consumption
in poor countries than in rich countries. Then, we use our model to assess the role
of transfer progressivity in explaining income per capita differences across countries. We
find that decreasing progressivity of poor countries to the levels of rich countries increases
income per capita of poor countries by 62%. However, a reduction in progressivity is not
necessarily welfare improving because although it increases the incentives to work and accumulate
physical and human capital, at the same time, it reduces social insurance—and
redistribution. Taking into account the trade-off between growth and insurance, we find
that moving poor economies to their optimal transfer progressivity increases their GDP per
capita by 56% and increases their welfare by 18% in consumption equivalent terms.