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Redistribution and Inequality in a Heterogeneous Society

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  • ROLAND HODLER

Abstract

This paper analyses how income redistribution affects inequality in a society in which individuals differ in their earning abilities and their preferences for consumption and leisure. After discussing the shortcomings of various standard approaches, I measure inequality in such a heterogeneous society by the inequality in individuals' so‐called equivalent wages. This approach suggests that redistribution tends to reduce inequality by transferring income from high‐ability to low‐ability individuals, but to increase inequality by transferring income from consumption‐loving to leisure‐loving individuals. These countervailing effects lead in all my simulations to a U‐shaped relationship between redistribution and inequality.

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  • Roland Hodler, 2009. "Redistribution and Inequality in a Heterogeneous Society," Economica, London School of Economics and Political Science, vol. 76(304), pages 704-718, October.
    • Handle: RePEc:bla:econom:v:76:y:2009:i:304:p:704-718
    DOI: 10.1111/j.1468-0335.2008.00727.x
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    Cited by:

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    3. Jacquet, Laurence & Van de Gaer, Dirk, 2011. "A comparison of optimal tax policies when compensation or responsibility matter," Journal of Public Economics, Elsevier, vol. 95(11), pages 1248-1262.

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