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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

Abstract: 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
Date: 2013-04-29
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