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Fairness and externalities

Author

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  • Velez, Rodrigo A.

    () (Department of Economics, Texas A&M University)

Abstract

We study equitable allocation of indivisible goods and money among agents with other-regarding preferences. First, we argue that Foley's (1967) equity test, i.e., the requirement that no agent prefer the allocation obtained by swapping her consumption with another agent, is suitable for our environment. Then, we establish the existence of allocations passing this test for a general domain of preferences that accommodates prominent other-regarding preferences. Our results are relevant for equitable allocation among inequity-averse agents and in a domain with linear externalities that we introduce. Finally, we present conditions guaranteeing that these allocations are efficient.

Suggested Citation

  • Velez, Rodrigo A., 2016. "Fairness and externalities," Theoretical Economics, Econometric Society, vol. 11(1), January.
  • Handle: RePEc:the:publsh:1651
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    References listed on IDEAS

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    1. Ernst Fehr & Klaus M. Schmidt, 1999. "A Theory of Fairness, Competition, and Cooperation," The Quarterly Journal of Economics, Oxford University Press, vol. 114(3), pages 817-868.
    2. Svensson, Lars-Gunnar, 1983. "Large Indivisibles: An Analysis with Respect to Price Equilibrium and Fairness," Econometrica, Econometric Society, vol. 51(4), pages 939-954, July.
    3. Varian, Hal R., 1976. "Two problems in the theory of fairness," Journal of Public Economics, Elsevier, vol. 5(3-4), pages 249-260.
    4. Kirsten Rohde, 2010. "A preference foundation for Fehr and Schmidt’s model of inequity aversion," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 34(4), pages 537-547, April.
    5. Azrieli, Yaron & Shmaya, Eran, 2014. "Rental harmony with roommates," Journal of Economic Theory, Elsevier, vol. 153(C), pages 128-137.
    6. Andersson, Tommy & Ehlers, Lars & Svensson, Lars-Gunnar, 2014. "Budget-balance, fairness and minimal manipulability," Theoretical Economics, Econometric Society, vol. 9(3), September.
    7. Varian, Hal R., 1974. "Equity, envy, and efficiency," Journal of Economic Theory, Elsevier, vol. 9(1), pages 63-91, September.
    8. Andrew McLennan & Rabee Tourky, 2008. "Using volume to prove Sperner’s Lemma," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 35(3), pages 593-597, June.
    9. Martin Dufwenberg & Paul Heidhues & Georg Kirchsteiger & Frank Riedel & Joel Sobel, 2011. "Other-Regarding Preferences in General Equilibrium," Review of Economic Studies, Oxford University Press, vol. 78(2), pages 613-639.
    10. Martin Sandbu, 2008. "Axiomatic foundations for fairness-motivated preferences," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 31(4), pages 589-619, December.
    11. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-1348, December.
    12. William Neilson, 2006. "Axiomatic reference-dependence in behavior toward others and toward risk," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 28(3), pages 681-692, August.
    13. Noguchi, Mitsunori & Zame, William R., 2006. "Competitive markets with externalities," Theoretical Economics, Econometric Society, vol. 1(2), pages 143-166, June.
    14. Alkan, Ahmet & Demange, Gabrielle & Gale, David, 1991. "Fair Allocation of Indivisible Goods and Criteria of Justice," Econometrica, Econometric Society, vol. 59(4), pages 1023-1039, July.
    15. Tadenuma Koichi & Thomson William, 1995. "Games of Fair Division," Games and Economic Behavior, Elsevier, vol. 9(2), pages 191-204, May.
    16. Serge-Christophe Kolm, 1995. "The Economics Of Social Sentiments: The Case Of Envy," The Japanese Economic Review, Japanese Economic Association, vol. 46(1), pages 63-87, March.
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    Citations

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    Cited by:

    1. Rodrigo A. Velez, 2017. "Equitable rent division," Working Papers 20170818-001, Texas A&M University, Department of Economics.
    2. Rafael Treibich, 2019. "Welfare egalitarianism with other-regarding preferences," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 52(1), pages 1-28, January.
    3. Klaus, Bettina, 2009. ""Fair marriages": An impossibility," Economics Letters, Elsevier, vol. 105(1), pages 74-75, October.
    4. repec:eee:mateco:v:70:y:2017:i:c:p:166-175 is not listed on IDEAS
    5. Obara, Takuya & Tsugawa, Shuichi & Managi, Shunsuke, 2019. "Envy-free Pricing for Impure Public Good," CCES Discussion Paper Series 69, Center for Research on Contemporary Economic Systems, Graduate School of Economics, Hitotsubashi University.
    6. Rodrigo A. Velez, 2017. "Sharing an increase of the rent fairly," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 48(1), pages 59-80, January.
    7. Maria Gabriella Graziano & Claudia Meo & Nicholas C. Yannelis, 2018. "Housing market models with consumption externalities," CSEF Working Papers 500, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    8. Velez, Rodrigo A., 2015. "Sincere and sophisticated players in an equal-income market," Journal of Economic Theory, Elsevier, vol. 157(C), pages 1114-1129.
    9. Mackenzie, Andrew & Trudeau, Christian, 2018. "Club good mechanisms: from free-riders to citizen-shareholders, from impossibility to characterization," Research Memorandum 012, Maastricht University, Graduate School of Business and Economics (GSBE).
    10. Andrew Mackenzie & Christian Trudeau, 2019. "On Mechanisms for Costly Inclusion," Working Papers 1901, University of Windsor, Department of Economics.
    11. Graziano, Maria Gabriella & Meo, Claudia & Yannelis, Nicholas C., 2017. "Stable sets for exchange economies with interdependent preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 140(C), pages 267-286.
    12. repec:eee:matsoc:v:90:y:2017:i:c:p:100-110 is not listed on IDEAS
    13. Azrieli, Yaron & Shmaya, Eran, 2014. "Rental harmony with roommates," Journal of Economic Theory, Elsevier, vol. 153(C), pages 128-137.
    14. repec:spr:reecde:v:22:y:2018:i:1:d:10.1007_s10058-018-0210-7 is not listed on IDEAS
    15. Velez, Rodrigo A., 2017. "Inequity-averse preferences in general equilibrium," Journal of Mathematical Economics, Elsevier, vol. 70(C), pages 166-175.
    16. repec:ebl:ecbull:eb-17-00267 is not listed on IDEAS
    17. Takuya Obara & Shuichi Tsugawa, 2019. "Public good provision financed by nonlinear income tax under reduction of envy," Working Papers e130, Tokyo Center for Economic Research.
    18. Nicolò, Antonio & Velez, Rodrigo A., 2017. "Divide and compromise," Mathematical Social Sciences, Elsevier, vol. 90(C), pages 100-110.

    More about this item

    Keywords

    Equity; efficiency; other-regarding preferences; equal income competitive allocations; first welfare theorem;

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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