Cohesion, insurance and redistribution

Federico Echenique*, Jon X. Eguia

*Corresponding author for this work

Research output: Contribution to journalArticle (Academic Journal)peer-review

1 Citation (Scopus)

Abstract

Governments use redistributive policies to favor relatively unproductive economic sectors. Traditional economic wisdom teaches that the government should instead buy out the agents in these sectors, and let them relocate to more productive sectors. We show that redistribution to a sector whose agents have highly correlated incomes generates an insurance value. Taking this insurance value into account, a buy-out is not sufficient to compensate the agents in the sector for relocating. In fact, it may be efficient for the government to sustain agents in an activity that, while less productive, is subject to correlated income shocks. US data suggests that indeed, sectors that receive transfers are subject to more correlated income shocks than others.

Original languageEnglish
Pages (from-to)287-305
Number of pages19
JournalQuarterly journal of political science
Volume2
Issue number4
DOIs
Publication statusPublished - 2007

Keywords

  • redistribution
  • insurance
  • cohesion
  • POLITICAL-ECONOMY
  • SPECIAL INTERESTS
  • TRADE

Cite this