Working Paper: NBER ID: w24754
Authors: Assaf Razin; Efraim Sadka
Abstract: Globalization, in the form of financial flows, which is always advantageous on an aggregative level, typically creates winners and losers, if left exclusively to market forces. The paper demonstrates that typical welfare-state redistribution policies, governed by a majority of the population, spreads the globalization’s gains from trade to all income groups, even those who are low skilled and have small capital endowments. Therefore, financial globalization of a welfare-state economy generates a Pareto improvement.
Keywords: Welfare State; Globalization; Income Inequality; Tax Competition
JEL Codes: E44; E62; F21; F6; H0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial globalization (F65) | redistribution of gains (H23) |
| redistribution of gains (H23) | welfare state policies (I38) |
| majority's wealth and labor market skills (J49) | efficacy of welfare state policies (I38) |
| tax competition (H26) | race to the bottom (L49) |
| race to the bottom (L49) | shifting tax burden (H22) |
| shifting tax burden (H22) | lower domestic economic activity (F69) |
| welfare state's role (I38) | compensating losers from globalization (F69) |
| majority's skill level (C92) | welfare state's generosity (I38) |
| majority status (low-skilled) (J79) | total tax revenues decrease (H29) |
| majority status (high-skilled) (J79) | social benefits increase (I14) |
| financial globalization + welfare state (F65) | Pareto improvement (D61) |