The Big Trade-Off between Efficiency and Equity - Is it There?
24 Pages Posted: 18 Apr 2016
Date Written: March 2016
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.
Keywords: efficiency, equity, trade-off.
JEL Classification: D61, D63, E02, H2
Suggested Citation: Suggested Citation
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The Big Trade-Off between Efficiency and Equity - Is it There?
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