Welfare Composition and the Institutional Wealth of Nations: The Relationship Between Welfare State, Institutional Investors and Market Capitalization

ABSTRACT The rise of institutional investors is deeply intertwined with the structure of the welfare state. This article contends that welfare programs do not simply resist or accommodate financialization, but actively constitute its institutional foundations. Analyzing OECD countries, we move beyond debates casting social policy and finance as simple substitutes or complements. Instead, we reveal that their relationship hinges on the functional composition of welfare spending. Using panel regressions and structural equation modeling, we show that redistributive programs like public pensions and family benefits crowd out institutional investment by providing direct, non‐asset‐based security. Conversely, housing and health spending can actively fuel financial expansion by transforming social provisions into investable assets: housing through the creation of collateralizable property, while health spending generates revenue streams to insurance firms. Consequently, a state's social policy priorities directly shape the size and structure of its capital markets, differentiating varieties of financial capitalism by the institutional design of welfare institutions, rather than its spending.