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Optimal inequality behind the veil of ignorance

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  • Che-Yuan Liang

    (Uppsala University)

Abstract

In Rawls’ (A theory of justice. Harvard University Press, Cambridge, 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 (J Polit Econ 61:434–435, 1953, J Polit Econ 63:309–332, 1955, Am Polit Sci Rev 69:594–606, 1975) treated this situation as a decision under risk and arrived at utilitarianism using expected utility theory. This paper investigates the implications of applying cumulative 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 perceived as desirable. This optimal inequality result contrasts the implications of other social welfare criteria.

Suggested Citation

  • Che-Yuan Liang, 2017. "Optimal inequality behind the veil of ignorance," Theory and Decision, Springer, vol. 83(3), pages 431-455, October.
  • Handle: RePEc:kap:theord:v:83:y:2017:i:3:d:10.1007_s11238-017-9599-7
    DOI: 10.1007/s11238-017-9599-7
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    More about this item

    Keywords

    Veil of ignorance; Prospect theory; Social welfare function; Income inequality;
    All these keywords.

    JEL classification:

    • 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

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