Why are distortionary policies used when seemingly Pareto improvements exist? According to a standard textbook argument, a Pareto improvement can be obtained by eliminating the distortions, compensating the losers with a lump sum transfer, and redistributing the gains that are left over. We relax the assumption that winners know the losses suffered by the losers and show that the informationally efficient method of compensating losers may involve the use of seemingly inefficient (but informationally efficient) distortionary policies. The risk of overcompensating losers may make distortions informationally efficient, as there are points on the Pareto frontier where distortions are used.
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Volume (Year): 96 (2006) Issue (Month): 1 (March) Pages: 387-393 Download reference. The following formats are available: HTML
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Grossman, Gene M & Helpman, Elhanan, 1994.
"Protection for Sale,"
American Economic Review,
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[Downloadable!] (restricted)
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Gene M. Grossman & Elhanan Helpman, 1992.
"Protection For Sale,"
NBER Working Papers
4149, National Bureau of Economic Research, Inc.
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Stephen Coate & Stephen Morris, 1999.
"Policy Persistence,"
American Economic Review,
American Economic Association, vol. 89(5), pages 1327-1336, December.
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Stephen Coate & Stephen Morris, .
""Policy Persistence '',"
CARESS Working Papres
95-19, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
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Stephen Coate & Stephen Morris, .
"Policy Persistence,"
CARESS Working Papres
97-2, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
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