Journal of Political Economy Vol. 92 No. 2 1984
The Trade-Off between Equality and Efficiency
Abstract
This paper uses a 1976 microdata base to estimate the marginal cost of reducing income inequality with a policy that has distributional effects similar to the present tax-transfer system. The analysis uses a simulation methodology in which only the labor supply effects are evaluated; other behavioral effects are ignored. The most striking finding is that marginal cost is quite high even for modest labor supply elasticities. For example, in the benchmark case with a weighted-average economy-wide uncompensated wage elasticity of 0.2 (and compensated elasticity of 0.31), the disposable money income of upper-income quintiles of households is depressed by 9.51 for each dollar increase in the disposable money income of lower-income quintiles. When income equivalent values that take account of the value of leisure are compared, the marginal cost for this case is estimated to be 3.49.
- DOI
- 10.1086/261219
- Volume
- 92
- Issue
- 2
- Pages
- 175-203
- Language
- en
- Sources
- openalex crossref