Pareto-improving structural reforms

Gilles Saint-Paul

Research output: Contribution to journalArticlepeer-review


Economists recommend to partly redistribute gains to losers from a structural reform, which in many cases may be required for making the reform politically viable. However, taxation is distortionary. Then, it is unclear that compensatory transfers can support a Pareto-improving reform. This paper provides sufficient conditions for this to occur, despite tax distortions. In a setting where preferences are isoelastic, deregulation is implementable in a Pareto-improving way through compensatory lump-sum transfers, despite that these are financed by distortionary taxes. In a more general setting, there always exist Pareto-improving reforms but they may involve tightening regulation for some goods. I show that if demand cross-price elasticities are not be too large and that the reform is not too unbalanced, deregulation is again implementable in a Pareto-improving way. Finally, I consider counter-examples where some people earn rents associated with informational or institutional frictions, or where non homothetic preferences may make the schemes considered here not viable.

Original languageEnglish (US)
Article number105262
JournalJournal of Economic Theory
StatePublished - Jun 2021


  • Compensatory transfers
  • Deregulation
  • Pareto optimality
  • Price controls
  • Structural reform
  • Taxation

ASJC Scopus subject areas

  • Economics and Econometrics


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