The objective of this paper is to consider the following question. Does the presence of increasing returns introduce a fundamental trade-off between equity and efficiency objectives? We show that if the no-envy notion of Foley (1967) is taken as the equity criterion and Pareto optimality as the efficiency criterion, then the answer is yes; there exist economies with increasing returns and well-behaved preferences (and no agent-specific inputs) in which there do not exist any envy-free and Pareto optimal allocations. We also propose a weakening of the no-envy criterion and prove that this weaker equity notion is compatible with Pareto optimality in general non-convex economies.
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I am indebted to W. Thomson for many helpful discussions. Thanks are also due to D. Diamantaras and B. Dutta and to participants of seminars at Columbia University, University of Bielefeld, University of Alicante and Cornell University for comments on an earlier draft.
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Vohra, R. Equity and efficiency in non-convex economies. Soc Choice Welfare 9, 185–202 (1992). https://doi.org/10.1007/BF00192877
- Optimal Allocation
- Pareto Optimality
- Efficiency Criterion
- Pareto Optimal Allocation
- Equity Criterion