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New Directions in Welfare Oxford 2009 Conference for Economists in Academia and Policy

New Directions in Welfare Oxford 2009 Conference for Economists in Academia and Policy Oxford, 29 June – 1 July 2009 Willingness to Pay for Income Redistribution: Evidence from a Discrete Choice Experiment presented by Ilja Neustadt University of Zurich, Socioeconomic Institute

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New Directions in Welfare Oxford 2009 Conference for Economists in Academia and Policy

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  1. New Directions in Welfare Oxford 2009 Conference for Economists in Academia and Policy Oxford, 29 June – 1 July 2009 Willingness to Pay for Income Redistribution: Evidence from a Discrete Choice Experiment presented by Ilja Neustadt University of Zurich, Socioeconomic Institute ilja.neustadt@soi.uzh.ch

  2. Contents • Introduction and Motivation • Statement of the Hypotheses • Discrete Choice Experiments • Descriptive Statistics • Estimation Results • Conclusion and Discussion New Directions in Welfare, Oxford 2009

  3. 1. Introduction and Motivation I • Politicians and interest groups claim to know citizens’ preferences for income redistribution • Right-wing: redistribution excessive • Left-wing: pockets of poverty • In general: Is the welfare state still affordable? • Traditional contribution of economists: analysis of effects of redistributive policies New Directions in Welfare, Oxford 2009

  4. 1. Introduction and Motivation II • The central question should be: • What are the citizens’ preferences? • Objectives of this paper: • 1) measure citizens’ Willingness To Pay (WTP) for redistribution through a Discrete Choice Experiment (DCE) • 2) test several hypotheses concerning the determinants of the WTP New Directions in Welfare, Oxford 2009

  5. 1. Introduction and Motivation III • 3 strands of research into the demand for redistribution: • Relating the amount of public spending to economic, institutional, and behavioural factors [Alesina/Giuliano (2009), Akkoyunlu/Neustadt/Zweifel (2009)] • Problem: The amount of redistribution is an outcome of an interaction between demand and supply. The supply is governed by political institutions. New Directions in Welfare, Oxford 2009

  6. 1. Introduction and Motivation IV • 2.Measuring attitudes towards redistribution, e.g. “Should the government redistribute more income?” [Alesina/La Ferrara, JPubEc (2005)] • Problem: • No budget constraint is imposed. • Therefore, actual decision making (e.g. voting) cannot be predicted. New Directions in Welfare, Oxford 2009

  7. 1. Introduction and Motivation V • 3. Contingent Valuation (CV) experiments • [Boeri/Boersch-Supan/Tabellini, AER (2002)] • Problem: • The CV approach holds all the attributes of the good in question constant and only varies its price. • In the present context: uses of public money (health, old age etc.) and types of beneficiaries (national, foreigner) are held constant; the impact on income/wealth is varied. New Directions in Welfare, Oxford 2009

  8. 1. Introduction and Motivation VI • Advantages of a Discrete Choice Experiment: • allows to measure preferences • imposes the budget constraint through the price attribute • makes respondents choose between alternatives with varying attributes New Directions in Welfare, Oxford 2009

  9. 2. Statement of the Hypotheses I • 3 sets of factors influencing preferences for redistribution [Alesina/Glaeser (2004)]: • economic • political • behavioural New Directions in Welfare, Oxford 2009

  10. 2. Statement of the Hypotheses II • Standard model of income redistribution is based on the median-voter model: Romer (1975), Roberts (1977), Meltzer/Richard (1981) • Government collects proportional income taxes and redistributes as lump-sum transfers • Individuals with income below the mean support redistribution (potential beneficiaries) • Equilibrium tax rate = tax rate preferred by the voter with the median income New Directions in Welfare, Oxford 2009

  11. 2. Statement of the Hypotheses III • Hypothesis 1: • The demand for redistribution is expected to decrease with • (a) personal income, • (b) educational level, • (c) higher self-positioning on a social distance scale New Directions in Welfare, Oxford 2009

  12. 2. Statement of the Hypotheses IV • Models of income mobility: • Hirschman/Rothschild (1973): “tunnel effect” • Benabou/Ok (2001): Prospect of Upward Mobility (POUM) hypothesis • Upward earning mobility dampens poor voters’ support of redistribution • Empirical evidence by Alesina/La Ferrara (2005) • Opposite direction: voters with high income and low income expectations may favour redistribution New Directions in Welfare, Oxford 2009

  13. 2. Statement of the Hypotheses V • Hypothesis 2: • The demand for redistribution is expected to decrease with • (a) a higher difference between the individual and his father in terms of education, • (b) a higher difference between the individual and his father in terms of occupational prestige, • (c) higher upward income mobility in the past, • (d) higher upward income mobility in the future, • (e) larger positive change in the self-positioning on a social distance scale New Directions in Welfare, Oxford 2009

  14. 3. Discrete Choice Experiments I • DCE (also known as Conjoint Analysis): a tool for measuring individuals’ preferences for characteristics of goods (attributes) • Allow to elicit preferences for non-marketed and hypothetical goods • During a DCE, the respondents are repeatedly asked • to choose a hypothetical redistribution scenario (alternative) or • to stay in the status quo New Directions in Welfare, Oxford 2009

  15. 3. Discrete Choice Experiments II • Status quo and alternatives are defined by several attributes including their price • Each attribute can attain two or more levels • By varying the attributes‘ levels, different product alternatives are generated • Rational individual: always chooses the alternative with the highest utility • Researcher: infers the utility of an attribute from the observed choices • Main advantage: DCE imposes the budget constraint through a price attribute (tax rate) New Directions in Welfare, Oxford 2009

  16. citizens of other states 15% people in ill health 25% old-age pensioners 45% citizens of Western European states 10% Swiss citizens 75% unemployed 15% working poor 10% families with children 5% 3. Discrete Choice Experiments III:Representation of the Status Quo Amount of Redistribution 25 % of your income 25 % of GDP • Tax Rate Nationality of Beneficiaries Uses of Redistribution New Directions in Welfare, Oxford 2009

  17. citizens of other states 10% people in ill health 30% old-age pensioners 45% citizens of Western European states 15% Swiss citizens 75% unemployed 15% working poor 5% families with children 5% 3. Discrete Choice Experiments IV:Representation of an Alternative Amount of Redistribution 10 % of your income 15 % of GDP • Tax Rate Nationality of Beneficiaries Uses of Redistribution New Directions in Welfare, Oxford 2009

  18. 3. Discrete Choice Experiments V:Attributes and their Levels New Directions in Welfare, Oxford 2009

  19. 3. Discrete Choice Experiments VI • Attained utility (after optimization) is hypothesized to be given by: Vij = vi (aj ,pj, yi, si, εij )(1) v(.) : indirect utility function aj: attributes pertaining to scenarioj pj: price attribute pertaining to scenarioj yi: income of individuali si: socioeconomic characteristics of individuali εij: random error term New Directions in Welfare, Oxford 2009

  20. 3. Discrete Choice Experiments VII Assuming the error term to be additive, individuali chooses alternativejrather thanlif Pij= Pr [ wi (aj ,pj, yi, si) + εij ≥ wi(al ,pl, yi, si) + εil](2) • Probability that the systematic difference in attainable • utility dominates the ‘noise’: • Pij= Pr [εil – εij ≤ wi (aj ,pj, yi, si) – wi (al ,pl, yi, si)](3) New Directions in Welfare, Oxford 2009

  21. 3. Discrete Choice Experiments VIII • Usually, the deterministic part of utility is assumed to be linear,(4) • As always, theMRSmeasures the relative (subjective) importance of goods, • (5) • If attributemis the change in income, then theMRSmeasures marginal willingness to pay(MWTP) for attributek New Directions in Welfare, Oxford 2009

  22. 4. Some Descriptive Statistics • Representative sample with 979 respondents (70% German-speaking, 30% French-speaking) • The frequency distribution of income and education levels reflected the structure of the Swiss population. • Total decisions: 979*8=7,832. • 20% of decisions made in favour of an alternative over the status quo. • However, only 21% of respondents never opted for an alternative New Directions in Welfare, Oxford 2009

  23. 5. Estimation Results I:Simple Model (Attributes Only) New Directions in Welfare, Oxford 2009

  24. 5. Estimation Results II:Extended Model with Income Note: *** (**,*) denotes statistical significance at the 1 (5, 10) percent level. New Directions in Welfare, Oxford 2009

  25. 5. Estimation Results III:Extended Model with Income • Hypothesis 1(a): • to be rejected (WTP values increasing rather than • decreasing with income) • Hypothesis 1(b): • to be rejected (WTP values increasing rather than • decreasing with education) • Hypothesis 1 (c): mixed evidence New Directions in Welfare, Oxford 2009

  26. 5. Estimation Results IV:Extended Model with Social Mobility Note: (C)=partially confirmed, R=rejected. New Directions in Welfare, Oxford 2009

  27. 5. Estimation Results V:Extended Model with Social Mobility Note: (C)=partially confirmed, R=rejected. New Directions in Welfare, Oxford 2009

  28. 6. Discussion and Conclusion I • Status quo bias is high (3.75% of annual income) • Additional redistribution causes respondents to opt for the alternative with a lower probability • Even more true for an increase in the income tax • For an additional % point of GDP devoted for redistribution, an average respondent must be paid a compensation of • CHF 18.14 per month • (0.39% of monthly income) New Directions in Welfare, Oxford 2009

  29. 6. Discussion and Conclusion II • Demand for redistribution cannot be shown to decrease with personal income • Demand for redistribution is shown to increase with the level of education (however, only partial statistical significance) • Demand for redistribution is shown to decrease with higher self-positioning on a social scale but only for lower social classes New Directions in Welfare, Oxford 2009

  30. 6. Discussion and Conclusion III • Results of testing the POUM hypothesis: • In 4 out of 5 model specifications (except mobility in education), citizens with no mobility display the highest resistance against redistribution • Possible explanation: risk aversion (not controlled for in this study) • However: risk-aversion argument traditionally used to predict a positive WTP for redistribution • Still: risk aversion can explain the status quo bias New Directions in Welfare, Oxford 2009

  31. 6. Discussion and Conclusion IV • The results seem to suggest the following: • Swiss citizens do not consider public redistribution to be an effective means of protection against economic risks New Directions in Welfare, Oxford 2009

  32. 6. Discussion and Conclusion V • Limitations of the analysis: • Only purely economic explanations of demand for redistribution (income, social mobility) were tested. • Evidence relates to a point of time (may be subject to transitory shocks). • The status quo used in the experimental design was only an approximation of the actual status quo, which is individual-dependent. New Directions in Welfare, Oxford 2009

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