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Persistent Distortionary Policies with Asymmetric Information

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  • Matthew F. Mitchell
  • Andrea Moro

Abstract

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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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 96 (2006)
Issue (Month): 1 (March)
Pages: 387-393

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Handle: RePEc:aea:aecrev:v:96:y:2006:i:1:p:387-393

Note: DOI: 10.1257/000282806776157605
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Cited by:
  1. Anderson, Kym & Rausser, Gordon & Swinnen, Johan, 2013. "Political economy of public policies : insights from distortions to agricultural and food markets," Policy Research Working Paper Series 6433, The World Bank.
  2. Benjamin Bridgman, 2011. "Competition, Work Rules and Productivity," 2011 Meeting Papers 289, Society for Economic Dynamics.
  3. Johan F.M.Swinnen & Alessandro Olper & Thijs Vandemoortele, 2011. "The Political Economy of Policy Instrument Choice: Theory and Evidence from Agricultural Policies," LICOS Discussion Papers 27911, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
  4. Galasso, Alberto & Mitchell, Matthew & Virag, Gabor, 2014. "Market Outcomes and Dynamic Patent Buyouts," CEPR Discussion Papers 9847, C.E.P.R. Discussion Papers.
  5. Vincent Anesi & Daniel J Seidmann, 2012. "Bargaining in Standing Committees," Discussion Papers 2012-09, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  6. Elena Panova, 2011. "A Passion for Democracy," CIRANO Working Papers 2011s-47, CIRANO.

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