The Price of Egalitarianism

Yongsung Chang and Sun-Bin Kim

No 558, RCER Working Papers from University of Rochester - Center for Economic Research (RCER)

Abstract: We compute the welfare cost of egalitarianism - a tax policy that equalizes wages for all. The benchmark "laissez-faire" economy has features a la Aiyagari (1994) with endogenous labor supply. A progressive income tax provides insurance against income risks but at the cost of efficiency: it undermines highly productive workers' incentives to work. We find that in an economy with the labor-supply elasticity of 1, the welfare cost of egalitarianism, measured in consumption-equivalence units, is only 1% as the welfare gain from insurance against income risks nearly offsets the efficiency loss from distorting labor effort. However, with an elastic labor supply, the welfare cost of egalitarianism is as large as 7.5% of steady state consumption.

Keywords: Egalitarianism; Welfare Cost; Equal-Wage Policy; Income Risks. (search for similar items in EconPapers)
JEL-codes: E2 E6 J3 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2010-10
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mic and nep-pub
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Related works:
Journal Article: The Price of Egalitarianism (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:roc:rocher:558

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