An adverse social welfare consequence of a rich-to-poor income transfer: A relative deprivation approach

Oded Stark, Grzegorz Kosiorowski and Marcin Jakubek

No 102, University of Tübingen Working Papers in Business and Economics from University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics

Abstract: A transfer from a richer individual to a poorer one seems to be the most intuitive and straightforward way of reducing income inequality in a society. However, can such a transfer reduce the welfare of the society? We show that a rich-to-poor transfer can induce a response in the individuals' behaviors which actually exacerbates, rather than reduces, income inequality as measured by the Gini index. We use this result as an input in assessing the social welfare consequence of the transfer. Measuring social welfare by Sen's social welfare function, we show that the transfer reduces social welfare. These two results are possible even for individuals whose utility functions are relatively simple (namely, at most quadratic in all terms) and incorporate a distaste for low relative income. We first present the two results for a population of two individuals. We subsequently provide several generalizations. We show that our argument holds for a population of any size, and that the choice of utility functions which trigger this response is not singular - the results obtain for an open set of the space of admissible utility functions. In addition, we show that a rich-to-poor transfer can exacerbate inequality when we employ Lorenz-domination, and that it can decrease social welfare when we draw on any increasing, Schur-concave welfare function.

Keywords: A rich-to-poor transfer; Relative income; Sen's social welfare function (search for similar items in EconPapers)
JEL-codes: D30 D31 D60 D63 H21 I38 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-pbe and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Chapter: An Adverse Social Welfare Consequence of a Rich-to-Poor Income Transfer: A Relative Deprivation Approach (2017)
Working Paper: An adverse social welfare consequence of a rich-to-poor income transfer: A relative deprivation approach (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuewef:102

DOI: 10.15496/publikation-19537

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