Welfare Magnets, The Labor-Leisure Decision and Economic Efficiency

This paper develops a model designed to capture the fiscal externalities associated with redistributive policy in a system of jurisdictions. Policy changes in one jurisdiction affect other jurisdictions through both migration and work-disincentive effects. Previous work ignores work-disincentive effects and concludes that centralization is sufficient to eliminate fiscal externalities. Inclusion of work-disincentive effects unambiguously worsens fiscal externalities under both centralized and decentralized redistribution. Sufficiently severe work-disincentive effects guarantee that an increase in redistribution will harm the poor.