When Money Shouldn't Buy

Huesmann, Katharina; Wambach, Achim

Abstract

Banning money in markets for goods like education or health is a common policy to prevent unfair access by the wealthy. We investigate whether this policy is well-targeted for its intended goal. For this, we introduce a fairness criterion called discrimination-freeness which requires that goods are allocated independently of wealth. Using a model where willingness to pay increases with income, we find the answer depends critically on the level of wealth inequality. When inequality is high, a transfer ban is a well-aligned policy. It is then no more restrictive than requiring discrimination-freeness. The resulting allocations are constrained-efficient, meaning that any Pareto improvement would be discriminatory. When inequality is low, however, a transfer ban can be overly restrictive, as using monetary transfers may improve outcomes without causing discrimination. Our findings suggest that societies with more equitable wealth distribution may have more flexibility to use price mechanisms than those with high inequality.