DP1218 Efficiency and Equity: Is There a Trade-off?

Author(s): Isabel Correia
Publication Date: July 1995
Keyword(s): Aggregation, Distribution, Efficient Measures, Equity
JEL(s): D31, D61, D63
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1218

Efficient measures are often not implemented because of their potentially damaging effects on distribution, yet these distributional effects are scarcely studied in economics because of the idea that they are case specific. In this paper we show that when we can separate the effect on efficiency from the effect on distribution, that is when Gorman aggregation applies, the well-known result that aggregate effects can be computed independently of the distribution can be accompanied by a similar result on distribution; the effect on distribution is also distribution independent and can be computed using only aggregate effects. In a world with no lump-sum transfers and agent heterogeneity, we thus have an expeditious rule for defining a class of measures, which for a significative group of agent characteristics, are social welfare improving without requiring the knowledge of the characteristic distribution or the specific form of the social welfare function.