The Marginal Costs and Benefits of Redistributing Income and the Willingness to Pay for Status

Sam Allgood

Journal of Public Economic Theory, 2006, vol. 8, issue 3, 357-377

Abstract: The effect of status on aggregate welfare is ambiguous for marginal reforms that redistribute income. If average consumption falls, the change in relative consumption increases household utility but reinforces the decrease in household labor supply, raising welfare cost. For parameterizations of the model developed here, reforms which lower average consumption increase aggregate welfare. Numerical calculations show that status increases marginal welfare cost and marginal net benefit for a demogrant reform. Redistributing to high income households may increase aggregate welfare depending on the definition of average consumption and if the willingness to pay for status increases with income.

Date: 2006
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