Steven Shavell, A Note on Efficiency vs. Distributional Equity in Legal Rulemaking: Should Distributional Equity Matter Given Optimal Income Taxation?, 71 Am. Econ. Rev. (Papers & Proc.) 414 (1981).
Abstract: The question is addressed of whether the choice of legal rules ought to be influenced by consideration of their redistributive effects. The difficulty in redistributing income is acknowledged and is assumed to be due solely to the adverse effect of income tax on the incentive to work. An attempt at income redistribution via legal rules would result in the same sort of problem that exists under income tax regulations. If low-income individuals are treated favorably in a legal setting, a disincentive to work would be created analogous to a generous guaranteed minimum under the tax schedule. Despite imperfect ability to redistribute income through taxation, everyone would prefer that legal rules be chosen only on the basis of their efficiency. The specific hypothesis tested supposes that, under a liability rule, some or all individuals are led to exercise an inefficient level of care. By adoption of an efficient liability rule and by appropriate modification of the income tax schedule, everyone can be made better off.