Consensus income distribution

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Dokumentart: Article
Date: 2017-02-01
Source: University of Tübingen Working Papers in Economics and Finance ; No. 96
Language: English
Faculty: 6 Wirtschafts- und Sozialwissenschaftliche Fakultät
Department: Wirtschaftswissenschaften
DDC Classifikation: 330 - Economics
Keywords: Soziale Wohlfahrt , Volkswirtschaft
Other Keywords:
Maximization of social welfare
Isoelastic social welfare functions
Deadweight loss of tax and transfer
Concern at having a low relative income
Social planners’ aversion to inequality
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In determining the optimal redistribution of a given population’s income, we ask which factor is more important: the social planner’s aversion to inequality, embedded in an isoelastic social welfare function indexed by a parameter alpha, or the individuals’ concern at having a low relative income, indexed by a parameter beta in a utility function that is a convex combination of (absolute) income and low relative income. Assuming that the redistribution comes at a cost (because only a fraction of a taxed income can be transferred), we find that there exists a critical level of beta below which different isoelastic social planners choose different optimal allocations of incomes. However, if beta is above that critical level, all isoelastic social planners choose the same allocation of incomes because they then find that an equal distribution of incomes maximizes social welfare regardless of the magnitude of alpha.

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