Inequality Aversion and the Optimal Composition of Government Expenditure

John Creedy, Shuyun May Li and Solmaz Moslehi ()

No 1086, Department of Economics - Working Papers Series from The University of Melbourne

Abstract: This paper examines the choice of government expenditure on public goods and transfer payments, in the form of a pension, in an overlapping generations model. Government expenditure is tax-financed on a pay-asyou- go basis. A utilitarian judge chooses expenditures to maximize a social welfare function. The nonlinear solution is found to involve the ratio of a welfare-weighted average income, which depends on the inequality aversion of the judge, to arithmetic mean income. An approximation for this ratio is found which produces explicit solutions for the optimal composition. The result is used to obtain an indication of ‘implicit’ inequality aversion for a range of countries.

Keywords: Overlapping Generations; Composition of Government Expenditure; Utilitarian Social Welfare Function (search for similar items in EconPapers)
JEL-codes: D72 H11 H41 H53 (search for similar items in EconPapers)
Pages: 25 pages
Date: 2009
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Related works:
Journal Article: INEQUALITY AVERSION AND THE OPTIMAL COMPOSITION OF GOVERNMENT EXPENDITURE (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:mlb:wpaper:1086

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