Kaldor–Hicks efficiency

A Kaldor–Hicks improvement, named for Nicholas Kaldor and John Hicks, also known as the Kaldor–Hicks criterion, is a way of judging economic re-allocations of resources among people that captures some of the intuitive appeal of Pareto improvements, but has less stringent criteria and is hence applicable to more circumstances. A re-allocation is a Kaldor–Hicks improvement if those that are made better off could hypothetically compensate those that are made worse off and lead to a Pareto-improving outcome. The compensation does not actually have to occur (there is no presumption in favor of status-quo) and thus, a Kaldor–Hicks improvement can in fact leave some people worse off.

A situation is said to be Kaldor–Hicks efficient if no potential Kaldor–Hicks improvement from that situation exists.

Quotes

• There is a close and important relationship between Kaldor–Hicks efficiency and Posner's assignment rule. By assigning the appropriate entitlement to the party who would have purchased it had it not been for transaction costs, Posner's principle ensures that the entitlement will be secured by a party who would have been able to compensate the loser and still gain by the assaignment.
  • Jules L. Coleman, Markets, Morals and the Law (1988), p. 86