Groupings and the gains from tagging

•The groupings available to the government are given and fixed.•Which types of groups should the government choose to tag?.•We provide a quantitative assessment of how group differences affect the gains from tagging.

The central assumption of the large literature on “tagging” is that the groupings available to the government are given and fixed. But how many and which types of groups should the government choose to tag? This is the question addressed in this paper. Starting with a simple framework and ending with numerical simulations based on data from Finland, we show how groupings should be formed for tagging, and provide a quantitative assessment of how group differences affect the gains from tagging, and of the marginal welfare gains from increasing the number of groups being tagged.