The Efficiency of Equity

Abstract In standard neoclassical economics, efficiency and equity issues are largely treated as separate and separable issues. While this has been challenged within and outside the neoclassical tradition for some time, this paper argues that four recent strands of literature largely within the neoclassical tradition provide a solid empirical foundation for this challenge. These four strands refer to: (1) findings from the experimental literature on the importance of equity or fairness; (2) the subjective well-being literature on the importance of relative incomes and inequality on subjective well-being; (3) the distribution-adjusted well-being literature that combines measures of mean incomes with measures of income inequality to derive welfare judgments across space and time; and (4) the literature on the relationship between income and gender inequality and economic growth. All of these literatures provide a sound empirical basis for arguing that greater equity is critical for greater efficiency.