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In defense of the Kaldor-Hicks criterion

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  • Mukoyama, Toshihiko

Abstract

This paper argues the Kaldor-Hicks criterion can be a sensible criterion for judging the policy benefit in a dynamic economy if the agents can trade state-contingent securities regarding a future policy change. When the probability of the policy change is very small, ex-ante security trades can increase everyone’s consumption after the policy implementation when the Kaldor-Hicks criterion is met, even without an ex-post redistribution by the government.

Suggested Citation

  • Mukoyama, Toshihiko, 2023. "In defense of the Kaldor-Hicks criterion," Economics Letters, Elsevier, vol. 224(C).
    • Handle: RePEc:eee:ecolet:v:224:y:2023:i:c:s0165176523000563
    DOI: 10.1016/j.econlet.2023.111031
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    References listed on IDEAS

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    1. Mukoyama, Toshihiko, 2013. "Understanding the welfare effects of unemployment insurance policy in general equilibrium," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 347-368.
    2. Mukoyama, Toshihiko, 2021. "MIT shocks imply market incompleteness," Economics Letters, Elsevier, vol. 198(C).
    3. Ruediger Bachmann & Jinhui Bai & Minjoon Lee & Fudong Zhang, 2020. "The Welfare and Distributional Effects of Fiscal Volatility: a Quantitative Evaluation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 38, pages 127-153, October.
    4. David Domeij & Jonathan Heathcote, 2004. "On The Distributional Effects Of Reducing Capital Taxes," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 523-554, May.
    5. Ofer Setty & Yaniv Yedid-Levi, 2021. "On the Provision of Unemployment Insurance when Workers are Ex-Ante Heterogeneous," Journal of the European Economic Association, European Economic Association, vol. 19(1), pages 664-706.
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    More about this item

    Keywords

    Kaldor-Hicks criterion; Cost–benefit analysis; Heterogeneous-agent macroeconomics; Redistribution;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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