Strategic Welfare Policies with Migration: A Theoretical Model and Empirical Evidence

Abstract

We test the welfare magnet hypothesis for Europe. We modify the existing theoretical frameworks assuming that: (a) welfare services, intended as the output of welfare expenditure, not the poor’s income or social expenditure, enter the median voter’s utility function; (b) preferences depend on the position of the median voter in the income distribution; and (c) the total amount of welfare services provided may differ from the amount needed to finance them, because of inefficiencies in the transfer process. We then test the welfare magnet hypothesis for 22 European countries by estimating a reaction function corresponding to the generic form adopted by the literature, but using the variables inspired by the model. We find evidence of a positive strategic interaction among countries, which suggests a downward bias in the choice of the protection level because of welfare competition. The level of social protection also positively depends on GDP, the redistributive attitudes of residents and their weight in the population, vis-à-vis the migrants’ share, and the efficiency of social expenditure.