An ‘Internality’ Case for Efficient Transfers

Abstract

Previous efficiency arguments for redistribution have derived from an externality of some form. This paper investigates an ‘internality’ process–endogenous change of tastes by recipients of transfers–adapted from C. C. von Weizsäcker. Benevolent or paternalist preferences of donors do not enter the argument, unlike most previous theories. Taste change operates to alter the recipient's working behavior. His increased earnings make him no longer eligible for transfers. An income tax device or contingent loan repayment can be implemented to repay the original donors. Thus, Pareto superiority of the transfer may be established. Further consideration of information and enforcement costs suggests a case for collective action.

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