The crowding in hypothesis revisited: new insights into the impact of social protection expenditure on informal social capital

This study revisits the crowding in hypothesis and contributes to the literature in two ways. First, in addition to total social spending, we examine whether different types of social spending increase social capital among their target groups. Second, we distinguish within- from between-country effects of social spending. Data from the European Social Survey are analysed with logistic multilevel regression models. We analyse two indicators of informal social capital: having social contact with friends, family or work colleagues and having anyone to discuss intimate and personal matters with. The results show that the more governments spend on social protection, the more likely people within those countries are to have social and intimate contact. The results also demonstrate that within-country effects of the types of social spending on having social contact disappear once we control for unobserved heterogeneity between countries. Yet, within countries with higher social spending on sickness/health care, old age and social exclusion, we find that these specific expenditures facilitate intimate contact among people in bad health, retirees and people who are having difficulties living on their present income, respectively. Overall, the crowding in hypothesis is supported. We conclude that it is important to examine the types of social spending and to distinguish within- and between-country effects.