Discussion paper

DP11189 The big trade-off between efficiency and equity - is it there?

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.

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Citation

Andersen, T and J Maibom (2016), ‘DP11189 The big trade-off between efficiency and equity - is it there?‘, CEPR Discussion Paper No. 11189. CEPR Press, Paris & London. https://cepr.org/publications/dp11189