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Abstract

A large body of literature demonstrates that redistribution leads to inefficiencies due to distorted work incentives. Yet, this result is obtained under the assumption that people are absolutely free in their labor-leisure allocation decisions and that taxation is merely a wage cut. We challenge this assumption and study labor supply decisions
in a framework with the subsistence income constraint and a redistribution system which supports disadvantaged players. The results of the real-effort experiment show that the introduction of the moderate
subsistence income requirement causes a substantial increase in productivity among taxpayers, with slight additional boost if tax returns are transferred to recipients and not wasted unproductively. As for
recipients, the prospect of receiving a transfer significantly enhances
their productivity and spurs the overall efficiency leading to a self-sorting of recipients according to their skills.