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.
I would like to thank Peter Mieszkowski, Thomas R. Saving and participants at the 1994 annual meetings of the Public Choice Society for helpful comments and suggestions. Any remaining errors are my own.
Submitted - sswp890.pdf