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Coalition-enhancing fiscal policies in an open economy: A CES framework of Gale’s transfer paradox

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  • Kang, Minwook
  • Ye, Lei Sandy

Abstract

The motivation of our paper comes from David Gale’s seminal work in 1974. He constructed an example of the “transfer paradox” based on three Leontief functions. The transfer paradox is that when there is a set of agents in the home country and that the home country is trading with other countries, then certain public lump-sum tax transfer plans could make all agents in the home country better off. Our contributions are as follows. First, we show that such an example can be constructed with three smooth CES utility functions. Second, we establish the three crucial conditions for the existence of the transfer paradox: (1) the donor (a taxpayer) has stronger preference for the foreign good than the recipient; (2) the donor is ex-ante wealthier than the recipient; (3) the elasticity of substitution of the foreign country’s preference is strictly less than one.

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  • Kang, Minwook & Ye, Lei Sandy, 2014. "Coalition-enhancing fiscal policies in an open economy: A CES framework of Gale’s transfer paradox," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 141-147.
    • Handle: RePEc:eee:mateco:v:50:y:2014:i:c:p:141-147
    DOI: 10.1016/j.jmateco.2013.10.007
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    Cited by:

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    3. Kang, Minwook & Ye, Lei Sandy, 2016. "Advantageous redistribution with three smooth CES utility functions," Journal of Mathematical Economics, Elsevier, vol. 67(C), pages 171-180.

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