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The Impossibility of a Just Pigouvian

Working Paper 2007-69

Abstract

An income inequality measure satisfies the Pigou-Dalton transfer principle if progressive transfers decrease income inequality. When transfers cause transaction costs, one can trace out the maximum leakage such that the transfer pays at the margin. An income inequality measure is leaky-bucket consistent if the transaction costs of a transfer are neither negative nor do the exceed the amount of the transfer. We show that the Pigou-Dalton transfer principle and leaky-bucket consistency are not reconcilable.

Authors: Casilda Lasso de la Vega , Christian Seidl .

Keywords: Income distribution; Intermediate inequality indices; Unit-consistency
JEL: D31; D63.