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An Explanation of Inefficient Redistribution: Transfers Insure Cohesive groups

Echenique, Federico and Eguia, Jon X. (2005) An Explanation of Inefficient Redistribution: Transfers Insure Cohesive groups. Social Science Working Paper, 1234. California Institute of Technology , Pasadena, CA. (Unpublished)

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Redistributive policies often sustain inefficient economic sectors. Economists routinely argue that governments should let the sectors collapse, and compensate the affected agents. We explain why governments may instead prefer the inefficient redistribution. If income shocks in a given sector are more correlated than in the rest of the economy, and redistribution is related to individuals’ income, then by sustaining a sector, the government is also providing its agents with insurance. The agents would lose this insurance if they relocate to another sector. Government transfers to sectors with correlated in- comes are therefore worth more than their monetary value. A preliminary analysis of the publicly-available data suggests that indeed agents in sectors that receive transfers are subject to more correlated income shocks. Our results imply that buying out inefficient sectors may not be the second-best policy when agents cannot fully insure themselves (markets are incomplete).

Item Type:Report or Paper (Working Paper)
Echenique, Federico0000-0002-1567-6770
Additional Information:We specially thank Alessandro Lizzeri for his encouragement and suggestions early in the project. We also thank Daron Acemoglu for suggestions. Delia Grigg provided excellent research assistance.
Group:Social Science Working Papers
Subject Keywords:Inefficient redistribution, Cohesion, Insurance, Sectoral subsidies, Trade Policy, Collective Action
Series Name:Social Science Working Paper
Issue or Number:1234
Classification Code:JEL: D72, D61, H2
Record Number:CaltechAUTHORS:20170808-141549284
Persistent URL:
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:79949
Deposited By: Hanna Storlie
Deposited On:09 Aug 2017 18:49
Last Modified:03 Oct 2019 18:25

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