In-kind transfers, self-selection and optimal tax policy

Helmuth Cremer, Firouz Gahvari

Research output: Contribution to journalArticlepeer-review


This paper examines the role of public provision of goods as a redistributive mechanism when tax policies are designed optimally on the basis of the information available to the government. We characterize Pareto-efficient allocations that are attainable through the tax policy, and derive the conditions under which public provision will enhance welfare above the maximum that can be achieved through a mix of a general income tax and commodity taxes (price subsidies). First, when there are two produced goods, we prove that public provision is always Pareto-improving. The improvement is achieved through changing individuals' actual consumption levels. Second, with no restrictions on the number of goods, we derive a sufficient condition for public provision to be Pareto-improving. This is achieved by weakening self-selection constraints so that welfare improving tax changes are made possible. Suitable examples include provision of day care, basic health care and rights to a minimum old age pension.

Original languageEnglish (US)
Pages (from-to)97-114
Number of pages18
JournalEuropean Economic Review
Issue number1
StatePublished - Jan 1997


  • In-kind transfers
  • Optimal tax policy
  • Self-selection

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


Dive into the research topics of 'In-kind transfers, self-selection and optimal tax policy'. Together they form a unique fingerprint.

Cite this