Redistribution mechanisms

Many legal scholars believe that equity should be considered in designing legal rules. Kaplow and Shavell (1994) seriously challenged this approach. They proved that the tax transfer system is superior to legal rules in redistributing wealth. This paper reexamines their 'double distortion' claim, presenting two main arguments. The first shows that the 'double distortion' claim is not necessarily valid under welfarism. In particular, under an ex post approach to welfarism, which generally implies that society pays attention to the ex post (actual) rather than expected redistribution, the proof of the tax superiority breaks down. Secondly, and more importantly, it is proven that, in principle, tort rules can easily be designed to circumvent 'double distortion' effects. Thus, the tort system is not inherently more inefficient than the tax-transfer system in accomplishing redistribution. The paper generally concludes that although there are often no good reasons for redistribution within the legal system, theoretically and a priori it is not an inferior redistribution mechanism.