Social Sciences in China

Vol. 40, No. 3, 2019

Welfare Rigidity, the Composition of Public Expenditure and the Welfare Trap

(Abstract)

Huang Shaoan, Chen Yan and Li Rui

Welfare expenditure is characterized by rigidity, i.e., it goes up easily but is very hard to get down. We introduced welfare rigidity into an endogenous growth model that includes government expenditure to analyze the impact of welfare rigidity and the composition of public expenditure on economic growth and family utility. Our findings show that welfare spending and economic growth have a non-monotonic relationship that is negative or inverted U-shaped depending on cross-country differences. Higher welfare rigidity reduces long-term economic growth and household utility. According to the estimated optimal size of welfare expenditure, China, as a developing country with a large population, has to do all it can to improve people’s livelihood but must at the same time weigh its limited resources so that its welfare expenditure does not fall into a “welfare trap.”

Keywords: habit formation, welfare rigidity, economic growth, composition of public expenditure, welfare trap