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

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  • Stark, Oded
  • Kosiorowski, Grzegorz
  • Jakubek, Marcin

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.

Suggested Citation

  • Stark, Oded & Kosiorowski, Grzegorz & Jakubek, Marcin, 2017. "An adverse social welfare consequence of a rich-to-poor income transfer: A relative deprivation approach," Discussion Papers 264176, University of Bonn, Center for Development Research (ZEF).
  • Handle: RePEc:ags:ubzefd:264176
    DOI: 10.22004/ag.econ.264176
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    References listed on IDEAS

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    Cited by:

    1. Oded Stark & Jan Fałkowski, 2019. "On structural change, the social stress of a farming population, and the political economy of farm support," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 27(1), pages 201-222, January.

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    More about this item

    Keywords

    Public Economics;

    JEL classification:

    • D30 - Microeconomics - - Distribution - - - General
    • 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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