Consensus income distribution

Oded Stark, Fryderyk Falniowski and Marcin Jakubek

No 96, University of Tübingen Working Papers in Business and Economics from University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics

Abstract: 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.

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 (search for similar items in EconPapers)
JEL-codes: D31 D60 D63 H21 I38 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-pbe and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Consensus Income Distribution (2017)
Working Paper: Consensus income distribution (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuewef:96

DOI: 10.15496/publikation-15545

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