Quarterly Journal of Political Science > Vol 2 > Issue 4

Cohesion, Insurance and Redistribution

Federico Echenique, Division of the Humanities and Social Sciences, California Institute of Technology, USA, fede@caltech.edu , Jon X. Eguia, Department of Politics, New York University, USA, eguia@nyu.edu
Suggested Citation
Federico Echenique and Jon X. Eguia (2008), "Cohesion, Insurance and Redistribution", Quarterly Journal of Political Science: Vol. 2: No. 4, pp 287-305. http://dx.doi.org/10.1561/100.00006056

Publication Date: 31 Jan 2008
© 2007 F. Echenique and J. X. Eguia
Political economy,  Formal modelling,  International political economy


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In this article:
Socially Optimal Redistribution 
Limitations of Private Insurance 
Testable Implications 


Governments use redistributive policies to favor relatively unproductive economic sectors. Traditional economic wisdom teaches that the government should instead buy out the agents in these sectors, and let them relocate to more productive sectors. We showthat redistribution to a sector whose agents have highly correlated incomes generates an insurance value. Taking this insurance value into account, a buy-out is not sufficient to compensate the agents in the sector for relocating. In fact, it may be efficient for the government to sustain agents in an activity that, while less productive, is subject to correlated income shocks. US data suggests that indeed, sectors that receive transfers are subject to more correlated income shocks than others.