Is Income Redistribution a Form of Insurance, a Public Good or Both?

Abstract

This paper is an empirical study of redistributive preferences. Our interest is what motivates net contributors to support redistributive policies. Using instrumental variable estimation and exploiting a particularity of the Spanish labour market we estimate how workers’ declared preferences for unemployment benefits spending respond to changes in the local unemployment rate. We then decompose this response into the part explained by risk aversion, and thus demand for insurance, and the part explained by the public goods nature of redistribution. Our results suggest that the declared preferences of workers for unemployment benefits spending are driven by demand for insurance rather than any public goods component. We show how these results suggest that preferences for redistribution in the form of unemployment benefits are driven by insurance considerations rather than by any public goods consideration.

Keywords: Redistribution, Preference formation, Public goods

JEL Classification: D64, H53, H77