Redistribution and Small Coalitions of Friends

Fred Schroyen

Scandinavian Journal of Economics, 1997, vol. 99, issue 3, 405-424

Abstract: When side marketing trade is perfect, linear taxation of retradeable commodities is the only scheme that survives attempts to arbitrage. In this paper, I discuss tax schemes when side trading is imperfect in the sense that commodities can only be re‐exchanged within coalitions no larger than two people. In the framework of a two‐class economy, I identify coalitions which might have an incentive to form and provide a characterisation for the Pareto‐efficient tax scheme. The tax formula has a very simple form and strongly resembles the formula for the no‐side‐trade case. In a numerical exercise, the constraints imposed on policy by an imperfect side trading process are found to be almost as tough as those imposed by perfect side trading.

Date: 1997
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