A Note on Compensation Schemes

In general, an economic reform wins unanimous support only if it incorporates a scheme of compensation.

It is widely believed that

(a) all lump-sum compensations: (i) have impractical information requirements about the technology of firms and the preferences of households, or (ii) are not manipulation-proof.

(b) Non-lumpsum compensations constitute feasible alternatives.

Further to the dissenting views of Kemp and Wan, this note makes two points: The first is that in a realistic model with overlapping generations, there is a lump-sum compensation scheme which is manipulation-proof. The second is that the presence of multiple equilibria may create havoc for a non-lumpsum compensation scheme. In real life, we have no information to rule out multiplicity.