Document de travail

Generalized Compensation Principle

Aleh Tsyvinski et Nicolas Werquin


Economic disruptions (techonological change, trade liberalization, immigration flows) generally create winners and losers, i.e., wage gains for some individuals and wage losses for others. The compensation problem consists of designing a reform of the existing income tax system that offsets the wefare losses by redistributing the gains of the winners. We derive a closed-form formula for the compensating tax reform and its impact on the government budget when only distortionary tax instruments are available and wages are determined endogenously in general equilibrium. We apply this result to the compensation of automation in the U.S. and Germany.


Aleh Tsyvinski et Nicolas Werquin, « Generalized Compensation Principle », TSE Working Paper, n° 19-1051, novembre 2019.

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TSE Working Paper, n° 19-1051, novembre 2019