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Cohesion, insurance and redistribution *.
- Article from:
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Quarterly Journal of Political Science
- Article date:
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November 1, 2007
- Author:
- Echenique, Federico; Eguia, Jon X.
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Copyright informationCOPYRIGHT 2007 Now Publishers, Inc. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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ABSTRACT
Governments use redistributive policies to favor relatively unproductive economic sectors. Traditional economic wisdom teaches that the government should instead buy out the agents in these sectors, and let them relocate to more productive sectors. We show that redistribution to a sector whose agents have highly correlated incomes generates an insurance value. Taking this insurance value into account, a buy-out is not sufficient to compensate the agents in the sector for relocating. In fact, it may be efficient for the government to sustain agents in an activity that, while less productive, is subject to correlated income shocks. US data suggests that indeed, ...
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