To understand reasons for possible failures of 'good' economic reforms, we consider an institution which is always successful in making the best public decision from the utilitarian perspective. We show it is bound to introduce inequality if costs of a reform are privately known: the losers can not be always compensated. Thus, if equity is a primary concern, then some reforms with positive aggregate net gain might not be undertaken. If the utilitarian welfare is the only guide for making public decisions, implementing a reform might require the ability to ignore the associated social costs of inequality.
Bibliographical noteFunding Information:
We are grateful to E. Janeba for extensive and insightful discussions. We also wish to thank anonymous referees and especially the co-editor, D. Mookherjee, as well as A. Cukierman, M. Iyigun, A. Karaivanov, J.-F. Mertens, S. O. Parreiras, J. Rigolini, seminar participants at the University of Colorado at Boulder, Tel-Aviv University and those at the Second Game Theory World Congress in Marseille, Canadian Economic Theory Meetings in Vancouver, Public Economic Theory Meetings in Peking, 16th International Game Theory Festival in Stony Brook. Wang acknowledges financial support from the Social Sciences and Humanity Research Council of Canada.
- Common decision-making
- Economic change
ASJC Scopus subject areas
- Economics and Econometrics