Tax implementability of fair allocations

This paper examines the tax implementability of allocations based on fairness as no-envy (or envy-freeness) and its alternatives, by a tax schedule that depends on labor supply and gross income ((y,l)-implementability). A relevant incentive constraint is perishability of abilities, where agents can exert a lower ability level than they actually possess. We first show that in any economy, every envy-free allocation is (y,l)-implementable. On the other hand, whereas we already know that no-envy may be incompatible with first-best Pareto efficiency, the alternative equity concepts which circumvent this first-best equity-efficiency trade-off meet the obstacle of tax implementability even when labor supply is observable. We also clarify necessary and sufficient domain restrictions under which the egalitarian equivalent allocations satisfy the (y,l)-implementability condition.Received: 15 November 2002, Accepted: 7 July 2004, JEL Classification: D63, D78, H21Yukihiro Nishimura: A preliminary version of this paper was presented at the 35th Annual Meeting of the Canadian Economics Association (McGill University, Montreal, Quebec, Canada) and the Sixth International Conference of Society of Social Choice and Welfare (California Institute of Technology, Pasadena, USA). The author acknowledges Koichi Tadenuma, Francois Maniquet, Shinji Yamashige, Kotaro Suzumura, Paul Makdissi, Robin Boadway, Georg Tillmann, Stefan Dodds, the Associate Editor and anonymous referees for helpful comments. The usual disclaimer follows. Financial support from the Department of Economics and the School of Graduate Studies of Queens University, the Yokohama Academic Foundation and the Grant-in-Aid for Young Scientists (B) from the Ministery of Education, Culture, Sports, Science and Technology is gratefully acknowledged.