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Redistribution by means of lotteries

Listed author(s):
  • Gauthier, Stéphane
  • Laroque, Guy

A government designs anonymous income transfers between a continuum of citizens whose income valuation is privately known. When transfers are deterministic, the incentive constraints imply equal treatment independently of the government's taste for redistribution. We study whether random transfers may locally improve upon the egalitarian outcome. A suitable Taylor expansion offers an approximation of the utility function by a quasilinear function. The methodology developed by Myerson to deal with incentive constraints then yields a necessary and sufficient condition for the existence of a socially useful randomization. When this condition is met a large set of lotteries are locally improving. A special menu made of two lotteries only is of interest: all the agents with low risk aversion receive the same random transfer, financed by a deterministic tax paid by the high risk aversion agents.

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File URL: http://www.sciencedirect.com/science/article/pii/S0022053117300418
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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 169 (2017)
Issue (Month): C ()
Pages: 707-716

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Handle: RePEc:eee:jetheo:v:169:y:2017:i:c:p:707-716
DOI: 10.1016/j.jet.2017.04.002
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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  1. Peter Tufano, 2008. "Saving whilst Gambling: An Empirical Analysis of UK Premium Bonds," American Economic Review, American Economic Association, vol. 98(2), pages 321-326, May.
  2. Uri Possen & Pierre Pestieau & Steven Slutsky, 2002. "Randomization, revelation, and redistribution in a Lerner world," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 20(3), pages 539-553.
  3. Gauthier, Stéphane & Laroque, Guy, 2014. "On the value of randomization," Journal of Economic Theory, Elsevier, vol. 151(C), pages 493-507.
  4. Frøystein Gjesdal, 1982. "Information and Incentives: The Agency Information Problem," Review of Economic Studies, Oxford University Press, vol. 49(3), pages 373-390.
  5. Mauro Guillén & Adrian Tschoegl, 2002. "Banking on Gambling: Banks and Lottery-Linked Deposit Accounts," Journal of Financial Services Research, Springer;Western Finance Association, vol. 21(3), pages 219-231, June.
  6. repec:hal:pseose:hal-00969344 is not listed on IDEAS
  7. Guesnerie, Roger & Laffont, Jean-Jacques, 1984. "A complete solution to a class of principal-agent problems with an application to the control of a self-managed firm," Journal of Public Economics, Elsevier, vol. 25(3), pages 329-369, December.
  8. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
  9. Roger B. Myerson, 1981. "Optimal Auction Design," Mathematics of Operations Research, INFORMS, vol. 6(1), pages 58-73, February.
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