Transaction Falsification and the Difficulty of Achieving Pareto‐improving Gains from Trade through Lump‐sum Transfers

Abstract

Lump-sum transfer rules to redistribute the gains from free trade are examined. When individuals anticipate that free trade policy will come with a lump-sum transfer, they are going to change their behaviors under autarky in order to get larger transfers. In spite of this falsification, can a lump-sum transfer still make everyone enjoy the gains from free trade? In a model of simple exchange economy, a condition under which a lump-sum transfer can make it was found, but in general it is difficult to achieve Pareto-improving gains from free trade.

The great trilemma: are globalization, democracy, and sovereignty compatible?

“…80 The problem is that redistribution and the compensation of losers is problematic. First, the optimal form of redistribution is through lump-sum transfers but these have insurmountable informational requirements and are not incentive compatible (Dixit and Norman 1986;Ichino 2012). That is, this form of redistribution requires precise information about the characteristics of individuals who have strong incentives to misrepresent the impact of globalization.…”