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How does inequality aversion affect inequality and redistribution?

Matthew N. Murray (), Langchuan Peng () and Rudy Santore ()
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Matthew N. Murray: 505A Stokely Management Center University of Tennessee
Langchuan Peng: Nanjing Audit University
Rudy Santore: 505A Stokely Management Center University of Tennessee

The Journal of Economic Inequality, 2018, vol. 16, issue 4, No 3, 507-525

Abstract: Abstract We investigate the effects of inequality aversion on equilibrium labor supply, tax revenue, income inequality, and median voter outcomes in a society where agents have heterogeneous skill levels. These outcomes are compared to those which result from the behavior of selfish agents. A variant of Fehr-Schmidt preferences is employed that allows the externality from agents who are “ahead” to differ in magnitude from the externality from those who are “behind” in the income distribution. We find first, that inequality-averse preferences yield distributional outcomes that are analogous to tax-transfer schemes with selfish agents, and may either increase or decrease average consumption. Second, in a society of inequality-averse agents, a linear income tax can be welfare-enhancing. Third, inequality-averse preferences can lead to less redistribution at any given tax, with low-wage agents receiving smaller net subsidies and/or high-wage individuals paying less in net taxes. Finally, an inequality-averse median voter may prefer higher redistribution even if it means less utility from own consumption and leisure.

Keywords: Income distribution; Inequality aversion; Redistribution (search for similar items in EconPapers)
Date: 2018
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