The efficiency-equality tradeoff in public sector charity provision

Purpose – We investigate the outcomes of public sector charity provision, which relies on income redistribution. Increasing the level of redistribution can result in an efficiency-equality tradeoff. We investigate whether the efficiency-equality tradeoff can be explained by lowered work incentives. Methodology – The chapter uses the methodology of laboratory experiments. We remove the administration costs of redistribution to see if a significant source of the tradeoff can be explained by lower work incentives. Findings – We find a significant efficiency-equality tradeoff between low- and high-tax groups explained by lowered work incentives. Labor supply decisions are motivated by strategic and cooperative preferences which vary the size of the tradeoff. Limitations – Our analysis is limited to measuring the size and distribution of labor income. We discuss avenues such as allowing for crowding out and volunteerism, to further explore the impact of public sector charity provision. Practical and social implications – Charity can be provided by the public, private, and independent sector. The public sector must redistribute income to provide charity, which leads to an efficiency-equality tradeoff. This calls for a reconsideration of increasing dependence on public sector charity provision. Originality – The efficiency-equality tradeoff traditionally focuses on the labor supply response to taxation. We allow subjects to respond to how their taxes are being used as well. Subjects are also given feedback on whether they are net taxpayers into redistribution or net recipients from it.