Multifactorial Decomposition of Inequality: The Case of CAP

Abstract

The purpose of this article is to propose a theoretical foundation on the impact of a transfer scheme on income inequality in the redistribution process among participants in a related agreement. Our example involves the study of the Common Agricultural Policy implemented by EU Countries. First, we show that ex-post inequality (after the distribution process) may increase if either initial aggregate income or the amounts of fiscal contributions are sufficiently high. Second, we characterize a multifactorial methodology according to Palestini and Pignataro (2014) to gauge the impact of redistribution and the effects of different income sources to the inequality profile. Finally, we propose an exercise where a hypothetical policy is implemented and we apply the Banzhaf and Shapley values to determine the marginal contributions of each factor to overall inequality.