Optimal Inequality behind the Veil of Ignorance
AbstractIn Rawls’ (1971) influential social contract approach to distributive justice, the fair income distribution is the one that an individual would choose behind a veil of ignorance. Harsanyi (1953, 1955, 1975) treats this situation as a decision under risk and arrives at utilitarianism using expected utility theory. This paper investigates the implications of applying prospect theory instead, which better describes behavior under risk. I find that the specific type of inequality in bottom-heavy right-skewed income distributions, which includes the log-normal income distribution, could be socially desirable. The optimal inequality result contrasts the implications of other social welfare criteria.
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Bibliographic InfoPaper provided by Uppsala University, Department of Economics in its series Working Paper Series, Center for Fiscal Studies with number 2013:4.
Length: 26 pages
Date of creation: 29 Apr 2013
Date of revision:
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Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
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More information through EDIRC
veil of ignorance; prospect theory; social welfare function; income inequality;
Other versions of this item:
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-05-05 (All new papers)
- NEP-HPE-2013-05-05 (History & Philosophy of Economics)
- NEP-MIC-2013-05-05 (Microeconomics)
- NEP-UPT-2013-05-05 (Utility Models & Prospect Theory)
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