Does the Welfare State Induce Risk-Taking ?

In cross-national data on individual and country-level characteristics, the variance of log annual in come is shown to correlate positively with indicators of redistribution. The database comes from the Panel Comparabilit (PACO) project, affiliated with the Luxembourg Income Study (LIS), a first effort to provide comparable panel data across a broad range of countries. Countries in the sample include both eastern and western Europ, and the US. A radom effects permanent income regression is used country-by-country to estimate individual-specific income variance. The variance estimates are then regressed on individual and country characteristics. The results indicate robstly that variosu measures of risk are higher in countries with a higher share of social spending in GDP. The evidence can be interpreted as support for the argument that the Welfare State encourages risk-taking and thereby economic growth.