Inequality and Competition in State Redistributive Systems: Evidence From Welfare and Health

Abstract

When determining their redistributive budgets, states must strike a subtle balance-to provide for their needy residents without becoming a "welfare magnet" and attracting poor individuals from neighboring states. We examine the competing incentives that state politicians face in federal systems and their effects on program accessibility and redistributive spending across U.S. states between 2005 and 2011. Comparing two redistributive programs under state control-Medicaid and Temporary Assistance for Needy Families (TANF)-we find strong evidence of interstate competition in the case of cash assistance programs, but less evidence in the case of health care. Yet our data show that states do not alter their policies in response to rising inequality, that is, when the median voter becomes poorer than the average voter. Moreover, the Great Recession had a greater impact on TANF than Medicaid. We attribute these differential effects to different funding mechanisms used by the federal government to finance the two state-administered programs.