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Title: An Explanation of Inefficient Redistribution: Transfers Insure Cohesive Groups

Citation Type: Working Paper

Publication Year: 2005

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Abstract: Governments often target redistributive policies to unproductive sectors. The traditional economic wisdom is that the government should buy out the agents in these sectors, giving them the same utility as under the redistributive policy, and letting them relocate to more productive sectors. Instead, governments often provide transfers that maintain factors of production in unproductive sectors. We show that these transfers may not be inefficient, if the agents that receive them have more correlated incomes than agents in other sectors. So it may be cheap for a government to give a certain level of utility to a group if it engages in an activity that, while inefficient, is subject to correlated individual shocks. Empirically, in the US, positive transfers seems to go with correlation in incomes.

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Authors: Equia, Jon; Echenique, Federico

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Publication Number: 1234

Institution: Caltech

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Data Collections: IPUMS CPS

Topics: Other

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