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Leaky Buckets Versus Compensating Justice: An Experimental Investigation

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  • Eva Camacho-Cuena

    (Autonomous University of Madrid, Spain)

  • Tibor Neugebauer

    (University of Hanover, Germany)

  • Christian Seidl

    (University of Kiel, Germany)

Abstract

Leaky-bucket transactions can be regarded as income transfers allowing for transaction costs. In its most rudimentary form, leaky-bucket transactions trace out the maximum “leakage” of transaction costs before income inequality is exacerbated, or—alternatively—before a welfare loss is experienced. This notion suggests that part of the income transfer should reach the transferee in order to keep the degree of income inequality or social welfare intact. However, in general, this conjecture is theoretically wrong. Rather there exists a unique benchmark such that it holds only for transfers among income recipients below the benchmark. When both are above the benchmark, the transferee has to be given more than the amount taken from the transferor, and when they are on opposite sides of the benchmark, both should experience an income loss. These three cases cover progressive transfers only. Three more cases apply to regressive transfers, and six more cases apply to income gains. Each of these twelve cases is covered by the present paper. Yet experimental research shows poor empirical evidence for this theory. Subjects’ perceptions of maintaining the degree of income inequality rather follow a simple precept: If someone gains income, the other person involved should be positively compensated, and if someone loses income, the other person involved should be negatively compensated. This expresses sort of compensating justice rather than restoration of the former degree of income inequality according to the orthodox theory. Compensating justice is, however, at variance with the transfer principle.

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Paper provided by ECINEQ, Society for the Study of Economic Inequality in its series Working Papers with number 74.

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Length: 41 pages
Date of creation: 2007
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Handle: RePEc:inq:inqwps:ecineq2007-74

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  1. Chakravarty, Satya R, 1988. "Extended Gini Indices of Inequality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(1), pages 147-56, February.
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  8. Christian Seidl, 2001. "Inequality measurement and the leaky-bucket paradox," Economics Bulletin, AccessEcon, vol. 4(6), pages 1-7.
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Cited by:
  1. de la Vega, Casilda Lasso & Seidl, Christian, 2007. "The Impossibility of a Just Pigouvian," Economics Working Papers 2007,10, Christian-Albrechts-University of Kiel, Department of Economics.
  2. Traub, Stefan & Seidl, Christian & Schmidt, Ulrich, 2009. "An experimental study on individual choice, social welfare, and social preferences," European Economic Review, Elsevier, vol. 53(4), pages 385-400, May.

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