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Inequality Aversion And The Optimal Composition Of Government Expenditure

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  • Creedy, John
  • Li, Shuyun May
  • Moslehi, Solmaz

Abstract

This paper examines the choice between government expenditure on public goods and transfer payments, in the form of a pension, in an overlapping-generations model. Government expenditure is tax-financed on a pay-as-you-go basis. A utilitarian judge chooses expenditures to maximize a social welfare function. The nonlinear solution is found to involve the ratio of a welfare-weighted average income, which depends on the inequality aversion of the judge, to arithmetic mean income. An approximation for this ratio is found that produces explicit solutions for the optimal composition. The result is used to obtain an indication of “implicit†inequality aversion for a range of countries.

Suggested Citation

  • Creedy, John & Li, Shuyun May & Moslehi, Solmaz, 2010. "Inequality Aversion And The Optimal Composition Of Government Expenditure," Macroeconomic Dynamics, Cambridge University Press, vol. 14(S2), pages 290-306, November.
  • Handle: RePEc:cup:macdyn:v:14:y:2010:i:s2:p:290-306_00
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    More about this item

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government

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