An Explanation of Inefficient Redistribution: Transfers Insure Cohesive groups
- Creators
- Echenique, Federico
- Eguia, Jon X.
Abstract
Redistributive policies often sustain inefficient economic sectors. Economists routinely argue that governments should let the sectors collapse, and compensate the affected agents. We explain why governments may instead prefer the inefficient redistribution. If income shocks in a given sector are more correlated than in the rest of the economy, and redistribution is related to individuals' income, then by sustaining a sector, the government is also providing its agents with insurance. The agents would lose this insurance if they relocate to another sector. Government transfers to sectors with correlated in- comes are therefore worth more than their monetary value. A preliminary analysis of the publicly-available data suggests that indeed agents in sectors that receive transfers are subject to more correlated income shocks. Our results imply that buying out inefficient sectors may not be the second-best policy when agents cannot fully insure themselves (markets are incomplete).
Additional Information
We specially thank Alessandro Lizzeri for his encouragement and suggestions early in the project. We also thank Daron Acemoglu for suggestions. Delia Grigg provided excellent research assistance.Attached Files
Submitted - sswp1234.pdf
Files
Name | Size | Download all |
---|---|---|
md5:a4a67ef4ae852375b57eafb582a95cab
|
217.0 kB | Preview Download |
Additional details
- Eprint ID
- 79949
- Resolver ID
- CaltechAUTHORS:20170808-141549284
- Created
-
2017-08-09Created from EPrint's datestamp field
- Updated
-
2019-10-03Created from EPrint's last_modified field
- Caltech groups
- Social Science Working Papers
- Series Name
- Social Science Working Paper
- Series Volume or Issue Number
- 1234