Korpi, W. and J. Palme, 1998, "The Paradox of Redistribution and Strategies of Equality: Welfare State Institutions, Inequality, and Poverty in the Western Countries," American Sociological Review, 63(5): 661-687.
We find that by providing high-income earners with earnings-related benefits, encompassing social insurance instistutions can reduce inequality and poverty efficiently than can flat-rate or targeted benefits. This finding may surprise many scholars and policymakers. The traditional arguments favoring low-income targeting and flat-rate benefits have focused on the distribution of money actually transferred and overlook three basic circumstances. (1)The size of redistributive budgets is not necessarily fixed but tends to depend on the type of welfare state institutions that exist in a country. (2)There tends to be a trade-off between the extent of low-income targeting and the size of redistributive budgets. (3)And because large categories of citizens cannot or are not willing to acquire private earnings-related insurance and because of the socioeconomic selection processes operating, the outcomes of market-dominated distribution tend to be more unequal than the distribution found in earnings-related social insurance programs. Recognition of these factors help us understand what we call the paradox of redistribution: The more we target benefits at the poor only and the more concerned we are with creating equality via equal public transfers to all, the less likely we are to reduce poverty and inequality.