Transfer Progressivity and Development

Title: Transfer Progressivity and Development

Abstract: Using micro data from 34 countries including the poorest and the richest in the world we document (i) a negative relationship between the ability to insure consumption against income shocks and economic development and (ii) a negative relationship between the degree of transfer progressivity and the stage of economic development. Importantly, the computation of transfer progressivity includes public and private (everything that is not government) net transfers across households, which is particularly relevant for poor countries. Then, to capture these facts we propose a macroeconomic OLG model with idiosyncratic income shocks in which agents accumulate physical and human capital through learning-by-doing (a labor choice) and face a progressive income transfer function that depends on the stage of development. Our model is calibrated to replicate lifecycle and distributional moments of consumption, income and wealth separately for poor and rich countries. We find that transfer progressivity goes a long way in explaining the larger ability to insure consumption in poor countries than in rich countries. Finally, we use this economy to assess the role of transfer progressivity in explaining income per capita and welfare differences across countries. Our preliminary results suggest an important role for progressivity in explaining income and welfare differences across countries.