Optimal Inequality behind the Veil of Ignorance
Che-Yuan Liang ()
No 2013:4, Working Paper Series, Center for Fiscal Studies from Uppsala University, Department of Economics
In Rawls’ (1971) influential social contract approach to distributive justice, the fair income distribution is the one that an individual would choose behind a veil of ignorance. Harsanyi (1953, 1955, 1975) treats this situation as a decision under risk and arrives at utilitarianism using expected utility theory. This paper investigates the implications of applying prospect theory instead, which better describes behavior under risk. I find that the specific type of inequality in bottom-heavy right-skewed income distributions, which includes the log-normal income distribution, could be socially desirable. The optimal inequality result contrasts the implications of other social welfare criteria.
Keywords: veil of ignorance; prospect theory; social welfare function; income inequality (search for similar items in EconPapers)
JEL-codes: D03 D31 D63 D81 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-hpe, nep-mic and nep-upt
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Working Paper: Optimal Inequality behind the Veil of Ignorance (2013)
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Persistent link: http://EconPapers.repec.org/RePEc:hhs:uufswp:2013_004
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