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Title: The big trade-off between efficiency and equity - is it there?

Author(s): Torben M Andersen and Jonas Maibom

Publication Date: March 2016

Keyword(s): efficiency, equity and trade-off.

Programme Area(s): Labour Economics

Abstract: Widely quoted cross-country evidence finds income to be negatively associated with inequality, which suggests that there is no trade-off between efficiency and equity. Such inference presumes that countries are at the frontier in the efficiency-equity space. We refute this for most OECD countries, and find that the best-practice frontier displays a trade-off. In accordance with standard economic theory, a larger tax burden is associated with lower efficiency and more equity. Interestingly, there is no evidence that the trade-off has become steeper over the sample period 1980-2010. Country positions differ significantly with some being consistently at or close to the frontier, while others are well inside the opportunity set.

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Bibliographic Reference

Andersen, T and Maibom, J. 2016. 'The big trade-off between efficiency and equity - is it there?'. London, Centre for Economic Policy Research. http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11189