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Habit formation and dependency in the welfare state

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journal contribution
posted on 07.06.2017, 05:23 by Jakee, Keith, Sun, Guang-Zhen
External habit formation explains why welfare states can be expected to exhibit increasing dependency over time through increases in the share of the population receiving welfare transfers, while the average number of hours worked decreases. Under plausible parameter values, the rate of taxation (and also the welfare expenditure share of national income) monotonically increases over time and asymptotically approaches a steady state. A positive interactive feedback loop between slow-moving external habits and welfare policies makes the extent of redistribution a "moving target". Consequently, setting arbitrary redistributive goals may never satisfy redistributional demands in future periods. At the same time, technological progress may mask the underlying dynamic effects of the welfare state.


Year of first publication



Department of Economics