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Consensus income distribution

Author

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  • Stark, Oded
  • Falniowski, Fryderyk
  • Jakubek, Marcin

Abstract

In determining the optimal redistribution of a given population's income, we ask which factor is more important: the social planner's aversion to inequality, embedded in an isoelastic social welfare function indexed by a parameter alpha, or the individuals' concern at having a low relative income, indexed by a parameter beta in a utility function that is a convex combination of (absolute) income and low relative income. Assuming that the redistribution comes at a cost (because only a fraction of a taxed income can be transferred), we find that there exists a critical level of beta below which different isoelastic social planners choose different optimal allocations of incomes. However, if beta is above that critical level, all isoelastic social planners choose the same allocation of incomes because they then find that an equal distribution of incomes maximizes social welfare regardless of the magnitude of alpha.

Suggested Citation

  • Stark, Oded & Falniowski, Fryderyk & Jakubek, Marcin, 2017. "Consensus income distribution," University of Tübingen Working Papers in Business and Economics 96, University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics.
    • Handle: RePEc:zbw:tuewef:96
    DOI: 10.15496/publikation-15545
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    References listed on IDEAS

    as
    1. Stark, Oded & Fan, C. Simon, 2011. "Migration for degrading work as an escape from humiliation," Journal of Economic Behavior & Organization, Elsevier, vol. 77(3), pages 241-247, March.
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    6. Oded Stark & Walter Hyll & Yong Wang, 2012. "Endogenous Selection of Comparison Groups, Human Capital Formation, and Tax Policy," Economica, London School of Economics and Political Science, vol. 79(313), pages 62-75, January.
    7. Blanchflower, David G. & Oswald, Andrew J., 2008. "Hypertension and happiness across nations," Journal of Health Economics, Elsevier, vol. 27(2), pages 218-233, March.
    8. David Andolfatto, 2002. "A Theory of Inalienable Property Rights," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 382-393, April.
    9. C. Simon Fan & Oded Stark, 2011. "A Theory Of Migration As A Response To Occupational Stigma," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(2), pages 549-571, May.
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    21. Frey, Bruno S & Stutzer, Alois, 2000. "Happiness, Economy and Institutions," Economic Journal, Royal Economic Society, vol. 110(466), pages 918-938, October.
    22. Oded Stark & Walter Hyll, 2011. "On the Economic Architecture of the Workplace: Repercussions of Social Comparisons among Heterogeneous Workers," Journal of Labor Economics, University of Chicago Press, vol. 29(2), pages 349-375.
    23. Abasolo, Ignacio & Tsuchiya, Aki, 2004. "Exploring social welfare functions and violation of monotonicity: an example from inequalities in health--a reply to Jan Abel Olsen," Journal of Health Economics, Elsevier, vol. 23(2), pages 333-334, March.
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    Cited by:

    1. Stark, Oded & Zawojska, Ewa & Kohler, Wilhelm & Szczygielski, Krzysztof, 2018. "An adverse social welfare effect of a doubly gainful trade," Journal of Development Economics, Elsevier, vol. 135(C), pages 77-84.
    2. Oded Stark, 2020. "An Economics-Based Rationale for the Rawlsian Social Welfare Program," Research on Economic Inequality, in: Inequality, Redistribution and Mobility, volume 28, pages 179-186, Emerald Group Publishing Limited.

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    More about this item

    Keywords

    Maximization of social welfare; Isoelastic social welfare functions; Deadweight loss of tax and transfer; Concern at having a low relative income; Social planners' aversion to inequality;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D60 - Microeconomics - - Welfare Economics - - - General
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

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