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Optimal control of inequality under uncertainty

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  • Martin Forster
  • Davide La Torre
  • Peter Lambert

Abstract

We consider the optimal control of inequality under uncertainty, with a particular focus on income inequality. For an economy experiencing economic growth and random shocks, we show how a simple loss and `bequest' function may be combined to guide the expected level of inequality towards a pre-defined target within a finite planning horizon. Closed form solutions show that, the stronger the shocks to the income distribution, the more aggressive is policy. We discuss the results in the context of recent applied and policy literature on social inequality, globalisation and economic instability.

Suggested Citation

  • Martin Forster & Davide La Torre & Peter Lambert, 2012. "Optimal control of inequality under uncertainty," Discussion Papers 12/07, Department of Economics, University of York.
    • Handle: RePEc:yor:yorken:12/07
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    References listed on IDEAS

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    Cited by:

    1. Ewald, Christian-Oliver & Yor, Marc, 2015. "On increasing risk, inequality and poverty measures: Peacocks, lyrebirds and exotic options," Journal of Economic Dynamics and Control, Elsevier, vol. 59(C), pages 22-36.
    2. Oluwaseun Sharomi & Tufail Malik, 2017. "Optimal control in epidemiology," Annals of Operations Research, Springer, vol. 251(1), pages 55-71, April.

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    More about this item

    Keywords

    Globalisation; Inequality; Stochastic dynamic programming;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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