Inequality-Aware Market Design
Paper Session
Sunday, Jan. 5, 2025 10:15 AM - 12:15 PM (PST)
- Chair: Piotr Dworczak, Northwestern University
Optimal Redistribution via Income Taxation and Market Design
Abstract
Policymakers around the world frequently distort goods markets via price controls, differential taxation, or by providing in-kind transfers---oftentimes motivated by redistributive goals. Such policies conflict with conventional economic wisdom (based on results like the second welfare theorem or the Diamond-Mirrlees and Atkinson-Stiglitz theorems) that redistribution should take place primarily through lump-sum transfers and income taxation. In this project, we study a model in which the social planner maximizes a utilitarian welfare function (with social welfare weights) over a population of agents who are heterogenous in both their ability to generate income and their taste for goods. We allow the planner to use an arbitrary incentive-compatible mechanism subject to a resource constraint. We first uncover a generalization of the Atkinson-Stiglitz theorem by showing that goods should be provided at prices proportional to marginal costs if (i) individual utility functions feature no income effects, (ii) redistributive preferences depend only on agents’ ability, and (iii) there is no statistical correlation between ability and taste for goods. Second, however, we show that the conclusion of the Atkinson-Stiglitz theorem fails if any of the three assumptions is relaxed. In a special case of our model in which the ability type is binary and the taste type is continuous, we derive the optimal mechanism and characterize the nature of optimal distortions introduced in the goods market.Should the Government Sell You Goods? Evidence from the Milk Market in Mexico
Abstract
Governments spend considerable resources providing goods directly. We show that such behavior may increase welfare when private suppliers have market power. We do this by studying the staggered rollout of hundreds of government milk "ration stores"" in Mexico using a proprietary panel of household food purchases. The rollout lowered the price per liter of privately supplied milk by 2.4% and increased household consumption. To compare direct provision with budget-neutral alternativesTaxing Externalities without Hurting the Poor
Abstract
We consider the optimal taxation of a good that exhibits a negative externality in a setting where agents differ in their value for the good,their disutility from the externality, and their value for money, while the planner observes neither. Pigouvian taxation is the unique Pareto efficient mechanism, yet it is only optimal if the planner puts higher Pareto weights on richer agents. We derive the optimal tax schedules for both narrow allocative and utilitarian objectives of the planner. The optimal tax is generically nonlinear and Pareto inefficient. The optimal mechanism might take a “non-market” form and cap consumption or forbid it altogether. We illustrate the tractability of our model by deriving closed-form solutions for the log-normal and Rayleigh distribution. We show that the idea of Atkinson and Stiglitz (1976), i.e., that a utilitarian planner should solely use income taxes and not commodity taxes, does not apply in our setting except under very specific circumstances. Finally, we calibrate our model and derive optimal taxes for the case of air travel.
Discussant(s)
Vasiliki Skreta
,
University of Texas-Austin and University College London
Dmitry Taubinsky
,
University of California-Berkeley
Mohammad Akbarpour
,
Stanford University
Dan Waldinger
,
New York University
JEL Classifications
- D47 - Market Design
- H42 - Publicly Provided Private Goods