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Efficiency versus Equity

Summary:
On VoxEU, Torben Andersen and Jonas Maibom point out that empirical findings of a positive correlation between efficiency and equity need not contradict elementary theoretical predictions. The trade-off [between efficiency and equity] applies at the frontier of the possibility set of combinations of economic performance and income equality available to policy makers. If policies and institutions are ‘well-designed’, the country is at the frontier. There is no free lunch and a trade-off inevitably arises. However, there may be many historical, institutional and political reasons why countries are not at the frontier. … in which case there is scope for improvements in both economic performance and income equality. This insight leaves one important message.

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On VoxEU, Torben Andersen and Jonas Maibom point out that empirical findings of a positive correlation between efficiency and equity need not contradict elementary theoretical predictions.

The trade-off [between efficiency and equity] applies at the frontier of the possibility set of combinations of economic performance and income equality available to policy makers. If policies and institutions are ‘well-designed’, the country is at the frontier. There is no free lunch and a trade-off inevitably arises.

However, there may be many historical, institutional and political reasons why countries are not at the frontier. … in which case there is scope for improvements in both economic performance and income equality.

This insight leaves one important message. In cross-country comparisons … differences in the distance to the frontier should be accounted for …

Dirk Niepelt
Dirk Niepelt is Director of the Study Center Gerzensee and Professor at the University of Bern. A research fellow at the Centre for Economic Policy Research (CEPR, London), CESifo (Munich) research network member and member of the macroeconomic committee of the Verein für Socialpolitik, he served on the board of the Swiss Society of Economics and Statistics and was an invited professor at the University of Lausanne as well as a visiting professor at the Institute for International Economic Studies (IIES) at Stockholm University.

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