IDEAS home Printed from https://ideas.repec.org/p/hal/psewpa/halshs-01972036.html
   My bibliography  Save this paper

Pareto-improving structural reforms

Author

Listed:
  • Gilles Saint-Paul

    () (PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Panthéon-Sorbonne - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics)

Abstract

Economists recommend to partly redistribute gains to losers from a structural reform, which in many cases may be required for making the reform politically viable. However, taxation is distortionary. Then, it is unclear that compensatory transfers can support a Pareto-improving reform. This paper provides sufficient conditions for this to occur, despite tax distortions. I consider an economy where workers have sector-specific skills and some sectors are regulated by a price floor. Transfers have to be financed by proportional taxation on firms revenues or, equivalently, labor income. Labor supply is elastic to net post-tax real wages, and hence reduced by taxation. In a setting where preferences are isoelastic, deregulation is implementable in a Pareto- improving way through compensatory lump-sum transfers, despite that these are financed by distortionary taxes. In a more general setting, there always exist Pareto-improving reforms but they may involved tightening regulation for some goods. I provide sufficient conditions for deregulation, i.e. a general reduction in price floors, to be Pareto-improving. They imply that demand cross-price elasticities should not be too large and that the reform should not be too unbalanced. Finally, I consider counter-examples where some people earn rents associated with informational or institutional frictions. In such situations, Pareto improvements are unlikely. If losers have veto power, the reform may only be supported by a minority of people. Broadening reform scope is especially useful to raise its political support when its impact is uneven across consumers.

Suggested Citation

  • Gilles Saint-Paul, 2018. "Pareto-improving structural reforms," PSE Working Papers halshs-01972036, HAL.
    • Handle: RePEc:hal:psewpa:halshs-01972036
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01972036
    as

    Download full text from publisher

    File URL: https://halshs.archives-ouvertes.fr/halshs-01972036/document
    Download Restriction: no

    References listed on IDEAS

    as
    1. M. Dewatripont & G. Roland, 1992. "Economic Reform and Dynamic Political Constraints," Review of Economic Studies, Oxford University Press, vol. 59(4), pages 703-730.
    2. David T. Coe & Dennis J. Snower, 1997. "Policy Complementarities: The Case for Fundamental Labor Market Reform," IMF Staff Papers, Palgrave Macmillan, vol. 44(1), pages 1-35, March.
    3. Roel M. W. J. Beetsma & Xavier Debrun, 2004. "Reconciling Stability and Growth: Smart Pacts and Structural Reforms," IMF Staff Papers, Palgrave Macmillan, vol. 51(3), pages 431-456, November.
    4. Saint-Paul, Gilles, 2007. "Making sense of Bolkestein-bashing: Trade liberalization under segmented labor markets," Journal of International Economics, Elsevier, vol. 73(1), pages 152-174, September.
    5. Guesnerie, Roger & Roberts, Kevin, 1987. "Minimum wage legislation as a second best policy," European Economic Review, Elsevier, vol. 31(1-2), pages 490-498.
    6. Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-1155, December.
    7. Gordon Tullock, 2003. "The Origin Rent-Seeking Concept," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 2(1), pages 1-8, April.
    Full references (including those not matched with items on IDEAS)

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:psewpa:halshs-01972036. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.