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Redistribution and market efficiency: An experimental study

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  • Großer, Jens
  • Reuben, Ernesto

Abstract

We study the interaction between competitive markets and income redistribution that reallocates unequal pre-tax market incomes away from the rich to the poor majority. In one setup, participants earn their income by trading in a double auction (DA) with exogenous zero or full redistribution. In another setup, after trading, they vote on redistributive tax policies in a majoritarian election with two competing candidates. This results in virtually full redistribution, even when participants have the opportunity to influence taxes by transferring money to the candidates. We find that the high redistribution reduces trading efficiency, but not as much as predicted if market participants trade randomly. This is because, rather than capitulating to the much lower trading incentives, many participants respond to redistribution by asking and bidding more conservatively in the DA, and in this way help to prevent further efficiency losses.

Suggested Citation

  • Großer, Jens & Reuben, Ernesto, 2013. "Redistribution and market efficiency: An experimental study," Journal of Public Economics, Elsevier, vol. 101(C), pages 39-52.
  • Handle: RePEc:eee:pubeco:v:101:y:2013:i:c:p:39-52
    DOI: 10.1016/j.jpubeco.2013.02.002
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    Cited by:

    1. Oskar Nupia, 2017. "Income Taxes, Political Accountability and Public Goods Provision," DOCUMENTOS CEDE 015835, UNIVERSIDAD DE LOS ANDES-CEDE.
    2. Doerrenberg, Philipp & Duncan, Denvil, 2014. "Tax Incidence in the Presence of Tax Evasion," IZA Discussion Papers 8137, Institute for the Study of Labor (IZA).
    3. repec:kap:expeco:v:20:y:2017:i:2:d:10.1007_s10683-016-9490-3 is not listed on IDEAS
    4. Agranov, Marina & Palfrey, Thomas R., 2015. "Equilibrium tax rates and income redistribution: A laboratory study," Journal of Public Economics, Elsevier, vol. 130(C), pages 45-58.
    5. Balafoutas, Loukas & Kocher, Martin G. & Putterman, Louis & Sutter, Matthias, 2013. "Equality, equity and incentives: An experiment," European Economic Review, Elsevier, vol. 60(C), pages 32-51.
    6. repec:kap:expeco:v:20:y:2017:i:2:d:10.1007_s10683-016-9493-0 is not listed on IDEAS
    7. Deffains, Bruno & Espinosa, Romain & Thöni, Christian, 2016. "Political self-serving bias and redistribution," Journal of Public Economics, Elsevier, vol. 134(C), pages 67-74.
    8. Höchtl, Wolfgang & Sausgruber, Rupert & Tyran, Jean-Robert, 2012. "Inequality aversion and voting on redistribution," European Economic Review, Elsevier, vol. 56(7), pages 1406-1421.
    9. Dmitry Ryvkin & Anastasia Semykina, 2015. "The chicken or the egg: An experimental study of democracy survival, income, and inequality," Working Papers wp2015_11_01, Department of Economics, Florida State University.
    10. Christos Bilanakos, 2012. "Consumers’ Heterogeneity, Publicness of Goods and the Size of Public Sector," University of Cyprus Working Papers in Economics 18-2012, University of Cyprus Department of Economics.
    11. R. Kline & F. Galeotti & R. Orsini, 2014. "When Foul Play Seems Fair: Dishonesty as a Response to Violations of Just Deserts," Working Papers wp920, Dipartimento Scienze Economiche, Universita' di Bologna.
    12. Sausgruber, Rupert & Tyran, Jean-Robert, 2014. "Discriminatory taxes are unpopular—Even when they are efficient and distributionally fair," Journal of Economic Behavior & Organization, Elsevier, vol. 108(C), pages 463-476.
    13. Tina Haussen, 2018. "Intra-Household Income Inequality and Preferences for Redistribution," Jena Economic Research Papers 2018-004, Friedrich-Schiller-University Jena.
    14. Sausgruber, Rupert & Tyran, Jean-Robert, 2011. "Are we taxing ourselves?," Journal of Public Economics, Elsevier, vol. 95(1), pages 164-176.
    15. Lefgren, Lars J. & Sims, David P. & Stoddard, Olga B., 2016. "Effort, luck, and voting for redistribution," Journal of Public Economics, Elsevier, vol. 143(C), pages 89-97.

    More about this item

    Keywords

    Redistribution; Double auction; Market efficiency; Elections; Lobbying;

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption

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