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Optimal inequality behind the veil of ignorance

Che-Yuan Liang ()

Theory and Decision, 2017, vol. 83, issue 3, 431-455

Abstract: Abstract In Rawls’ (A theory of justice. Harvard University Press, Cambridge, 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 (J Polit Econ 61:434–435, 1953, J Polit Econ 63:309–332, 1955, Am Polit Sci Rev 69:594–606, 1975) treated this situation as a decision under risk and arrived at utilitarianism using expected utility theory. This paper investigates the implications of applying cumulative 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 perceived as desirable. This 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)
Date: 2017
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Working Paper: Optimal Inequality behind the Veil of Ignorance (2013) Downloads
Working Paper: Optimal Inequality behind the Veil of Ignorance (2013) Downloads
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