Affirmative Action, Equal Opportunity, or just tax the rich? Development, efficiency, and the pursuit of equity

Tension between efficiency and equity is fundamental to every economy. Historical differences between groups translate into inequality in skills and hence earnings. Measures to correct inequalities affect incentives and misallocate talent, therefore compromising efficiency. This paper examines the efficiency properties of the three most common classes of equity policies: affirmative action, equal opportunity and tax-transfer. Our focus is to examine how the effectiveness of policies vary with the level of development and technology and the political maturity of the state. We argue that the optimal policy is likely to be different for different countries, and indeed for the same country at different stages of development. The intuition driving our approach is that the products produced in a less-developed economy are less complex and require lower embodied skills. Here, preferentially placing less prepared individuals in higher skill jobs does not compromise efficiency to too large an extent. In high-technology production processes, however, skills are more critical and productivities are interdependent, so it makes more economic sense to adequately train the inductees even at a relatively high cost. The most efficient outcomes are yielded by competitive markets accompanied by appropriate tax-transfer schemes. However, such schemes can effectively be used only by economies with the highest levels of socialisation and state capacity. We find that, in a low-complexity economy, reservation fares better than both training and tax transfer. As complexity of the production process increases training becomes more attractive and is in turn superseded by tax-transfers in the most complex and politically mature economies. These findings provide a step towards more informed and robust policy. We discuss several omissions and directions for further development.