Can Equity and Efficiency Complement Each Other?

31 Pages Posted: 28 Feb 2002 Last revised: 7 Feb 2021

Date Written: February 2002

Abstract

Economists tend to assume that redistributive transfers increase equity but cause a loss in efficiency, the so-called 'leaky bucket' effect. This paper explores situations where efficiency losses are small or where equity and efficiency might even complement each other. A simple model identifies key parameters that cause leaky buckets and which policy can affect. Three situations are discussed where the equity/efficiency tradeoff may be low: When transfers go to populations with no capacity to change their behavior; when transfers go to programs that limit efficiency losses through behavioral requirements; and when commodities are subsidized that function as long-term investments and create future income gains.

Suggested Citation

Blank, Rebecca M., Can Equity and Efficiency Complement Each Other? (February 2002). NBER Working Paper No. w8820, Available at SSRN: https://ssrn.com/abstract=302581

Rebecca M. Blank (Contact Author)

U.S. Department of Commerce ( email )

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202-482-3727 (Phone)

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