Variations in the Size of the Welfare State: A Preference- Based Explanation
UC Davis Working Paper #96-11
Posted: 18 Mar 1997
Date Written: November 1996
Transfer payments as a fraction of GNP in OECD countries vary from 30.4% in Belgium to 11.1% in Greece. We seek a political-economic explanation of this variation, as due to different preferences of national citizenries. Voters are modeled as caring about their personal welfare, the welfare of the unemployed, and the size of government. The political issue is the tax rate, where taxes fund support for those living on transfer payments. With the above formulation, utility functions are single-peaked in the marginal tax rate (the single political dimension); hence, a Condorcet winner exists, which we identify with the observed tax rate in a country. Next, assuming a specific parametric form for the distribution of voter traits, we compute a "preference parameter locus" for each country, a curve in parameter space consistent with the country's having the observed marginal tax rate as its Condorcet winner. We finally compare the preference parameter loci of seven OECD countries.
JEL Classification: D72, H20, P51
Suggested Citation: Suggested Citation