The Big Trade-Off between Efficiency and Equity - Is it There?

24 Pages Posted: 18 Apr 2016

See all articles by Torben M. Andersen

Torben M. Andersen

University of Aarhus - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Jonas Maibom

Aarhus University - School of Business and Social Sciences

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

Andersen, Torben M. and Maibom, Jonas, The Big Trade-Off between Efficiency and Equity - Is it There? (March 2016). CEPR Discussion Paper No. DP11189, Available at SSRN: https://ssrn.com/abstract=2766484

Torben M. Andersen (Contact Author)

University of Aarhus - Department of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Centre for Economic Policy Research (CEPR)

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IZA Institute of Labor Economics

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Jonas Maibom

Aarhus University - School of Business and Social Sciences ( email )

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Aarhus, DK 8270
Denmark

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