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Inequality and income: The mediating effects of social spending and risk

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  • Edward Castronova
Abstract
This paper estimates models of social spending, income risk, and per capita income levels using data from a post‐war panel of OECD (Organisation for Economic Cooperation and Development) countries. The objective is to test two theories about the pathway from inequality to per capita income. According to one theory, inequality reduces incomes because it induces social spending, which acts as a drag on the economy. The results here suggest, however, that inequality does not seem to induce social spending, and social spending does not seem to lower per capita incomes. According to a second theory, inequality causes upheaval which adds to the volatility of per capita income, which may reduce the level of per capita income. The results suggest, however, that volatility, measured here as the standard deviation of per capita income, has little measurable impact on either per capita income or social spending. The mainsprings of per capita income are more likely to be the traditional factors: the work force, human capital, and physical capital. JEL classification: E6.

Suggested Citation

  • Edward Castronova, 2001. "Inequality and income: The mediating effects of social spending and risk," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 9(2), pages 395-415, July.
    • Handle: RePEc:bla:etrans:v:9:y:2001:i:2:p:395-415
    DOI: 10.1111/1468-0351.00081
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    Cited by:

    1. Mario Holzner, 2010. "Inequality, Growth and Public Spending in Central, East and Southeast Europe," wiiw Balkan Observatory Working Papers 87, The Vienna Institute for International Economic Studies, wiiw.
    2. Achim Kemmerling, 2003. "Regional Input on the Social Dimension of Ezoneplus: Belgium, The Netherlands, France, Austria, and Germany," Eastward Enlargement of the Euro-zone Working Papers wp13c, Free University Berlin, Jean Monnet Centre of Excellence, revised 01 Mar 2003.

    More about this item

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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