A general theory of inverse welfare functions
Abstract
This paper develops a general theory to recover the inverse welfare function that rationalizes a given tax schedule as optimal. Our theory allows for complex environments including the presence of multidimensional tax schedules, bunching/jumping behavior, optimization frictions, general equilibrium effects, and externalities. We show that inverse welfare functions can be used to test for Pareto efficiency, construct Pareto improving reforms, and characterize the set of welfare improving local reforms, thereby extending previous results to more general environments. We show numerically that allowing for such generalities can have meaningful impacts on inverse welfare functions.
Fields of Study & Subjects
Local Government Finance and Decentralization
Fiscal Policy and Economic Growth
Economic Policies and Impacts
Publication details
- Journal / source
- Theoretical Economics
- Publisher
- The Econometric Society
- Volume
- 21
- Issue
- 3
- Pages
- 973–1018
- Publication date
- 1 January 2026
- Language
- EN