Subsidies for whom? The rule of (G+1)/2

Alejandro Corvalan

No 31, Working Papers from Facultad de Economía y Empresa, Universidad Diego Portales

Abstract: This paper shows that for a society with inequality described by a Gini coe¢ cient G, a pivotal individual is located in the (G + 1)=2 percentile: any dollar given to an individual poorer (richer) than himself decreases (increases) G. As a consequence, an optimal lump sum subsidy, in terms of the Gini index, is the one given to all individuals ranked below this percentile. We show that in 2/3 of the countries such an individual is within the eighth decile. Hence, from a comparative perspective, the (G + 1)=2 percentile is the rule of the eighth decile. All subsidies targeted below this decile contribute to egalitarian redistribution. This result is robust to the use of other inequality measures, such as Theil indices.

Date: 2011-12
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