Abstract
A number of recent papers have argued that social transfers may be necessary to secure Pareto optimality, if there is utility interdependence between potential donors and potential recipients. This paper establishes the types of welfare support plans that would be Pareto-optimal on different assumptions about the nature of utility interdependence. In particular, it identifies the assumptions about utility interdependence that are required to make Pareto-optimal plans out of a negative income or wage subsidy. The paper derives an expression for society's group rate of substitution between a recipient's income and leisure, which is shown to be instrumental in analyzing the Pareto optimality of proposed welfare plans.
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