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An interpretation of the Gini coefficient in a Stiglitz two-type optimal tax problem

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  • Bo Rasmussen

Abstract

In a two-type Stiglitz, J. Public Econ. 17, 213–240 ( 1982 ) model of optimal non-linear taxation it is shown that when the utility function relating to consumption is logaritmic the shadow price of the incentive constraint relating to the optimal tax problem exactly equals the Gini coefficient of the second-best optimal income distribution of a utilitarian government. In this sense the optimal degree of income redistribution is determined by the severity of the incentive problem facing the policy-maker. Extensions of the benchmark model to allow for more general functional forms of the utility function and for more than two types of workers reveal that also in these cases the desired degree of income redistribution is positively correlated with the shadow prices of the incentive constraints. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Bo Rasmussen, 2015. "An interpretation of the Gini coefficient in a Stiglitz two-type optimal tax problem," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 13(1), pages 17-26, March.
    • Handle: RePEc:kap:jecinq:v:13:y:2015:i:1:p:17-26
    DOI: 10.1007/s10888-014-9292-9
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    References listed on IDEAS

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    1. Arnott, Richard J & Hosios, Arthur J & Stiglitz, Joseph E, 1988. "Implicit Contracts, Labor Mobility, and Unemployment," American Economic Review, American Economic Association, vol. 78(5), pages 1046-1066, December.
    2. Stiglitz, Joseph E., 1982. "Self-selection and Pareto efficient taxation," Journal of Public Economics, Elsevier, vol. 17(2), pages 213-240, March.
    3. J. A. Mirrlees, 1971. "An Exploration in the Theory of Optimum Income Taxation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 38(2), pages 175-208.
    4. Sören Blomquist & Luca Micheletto, 2008. "Age‐related Optimal Income Taxation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(1), pages 45-71, March.
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