Please join us as the Department of Economics welcomes Dr. Filippo Massari (Fairfield University), who will present "Unconditional transfers, inequality and growth in the short and the long run" on Wednesday, October 28th at 3:30 PM in SAGE 3101.
Abstract: This paper builds a quantitative general equilibrium model to study the effects of unconditional transfers on the welfare of households across the wealth distribution in the short run and in the long run. This distinction highlights the novelty of the analysis: in a fully dynamic and yet tractable specification, the model accounts for the temporary growth effects of a change in the incentive of firms to invest in research and development (R&D). Transfers reduce labor supply and thus produce a positive effect on welfare through increased leisure, a negative effect on income through permanently lower aggregate production, and a temporary growth deceleration. They also reduce income inequality, increasing consumption for poor households. In the short run, the leisure and redistribution effects dominate, increasing welfare across the wealth distribution. However, the smaller scale of production induces firms to invest less in R&D, as they now spread R&D costs on fewer units produced. Over time, as lower entry reduces the number of firms and thus competition, growth reverts to its scale invariant steady state, and the productivity level converges to a path parallel to the baseline but with lower intercept. As a result of this transition characterized by a small but highly persistent growth slowdown, in the long run and in present value terms transfers reduce welfare for all households.