Does the Welfare State Induce Risk Taking?

In cross-national data on individual and country-level characteristics, the variance of log annual income is shown to correlate positively with indicators of redistribution. The database comes from the Panel Comparability (PACO) project, affiliated with the Luxembourg Income Study (LIS), a first effort to provide comparable panel data across a broad range of countries. Countries in the sample include both eastern and western Europe, and the US. A random effects permanent income regression is used country-by-country to estimate individual-specific income variance. The variance estimates are then regressed on individual and country characteristics. The results indicate robustly that various measures of risk are higher in countries with a higher share of social spending in GDP. The evidence can be interpreted as support for the argument that the Welfare State encourages risk-taking and thereby economic growth. “The data used in this study are from the public use version of the PACO datafiles, including data from the German Socio-Economic Panel, the British Household Panel Study, the Lorraine Panel Study, the Panel Study of Income Dynamics, the Luxembourg Household Panel Study, the Hungarian Household Panel Study, and the Polish Household Panel. The comparable variables in this datafile were created by the PACO project, coordinated through CEPS/INSTEAD in Luxembourg.” Contact: Room 109A Harkness Hall, Box 270158, Rochester NY 14627-0158. Phone 716/2757840, Fax 716/271-1616, email [email protected]. I thank Andrew Dick, Martin Werding, and participants in the 1998 Econometric Society winter meetings for helpful comments and suggestions. 1