"Transfers, Social Safety Nets, and Growth"

Xavier X. Sala-i-Martin

IMF Staff Papers,  1996.


In this paper I develop a simple model of optimal criminal behavior to analyze the role of public welfare policies such as redistributional transfers or wage subsidies. I show that pubic welfare acts as a crime-preventing device since it increases the opportunity cost of committing crimes. I argue that transfers and wage subsidies can be thought of a productive pubic goods subject to congestion, as with police protection and national defense. Transfers and wage subsidies are productive because they reduce the criminal-induced aggregate distortions in the economy. They are subject to congestion because when a person decides to increase his output he also increases the average output in the economy and, therefore, the reward to others of criminal actions. I find the growth-maximizing size of the public welfare-program and I show that public welfare should be financed with income (not lump-sum) taxes, despite the fact that income taxes are distortionary.


Illegal Behavior and the Enforcement of Law, K420. Provision and Effects of Welfare Programs, I380. Economic Growth and Aggregate Productivity: General (includes data sources), O400. Economics of Law and Crime, 9160. General Welfare Programs, 9110. Growth Theories--General, 1110.