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A theoretical framework for determining the appropriate level of subsidy in an economy

Author

Listed:
  • Augustine A. Osagiede

    ()

  • Virtue U. Ekhosuehi

    ()

Abstract

This paper develops a framework for determining the subsidy that, in the long run, serves to equalize the per capita income shares across income classes. The framework characterizes the income dynamics by a Markov process and uses the principle of maximum entropy for selecting among alternative subsidy schemes. The study provides a means to forecast the per capita income shares at any instant of time and serves as an objective tool to decide on the appropriate level of subsidy.

Suggested Citation

  • Augustine A. Osagiede & Virtue U. Ekhosuehi, 2015. "A theoretical framework for determining the appropriate level of subsidy in an economy," Operations Research and Decisions, Wroclaw University of Technology, Institute of Organization and Management, vol. 2, pages 19-34.
  • Handle: RePEc:wut:journl:v:2:y:2015:p:19-34:id:1130
    as

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    References listed on IDEAS

    as
    1. Lillard, Lee A & Willis, Robert J, 1978. "Dynamic Aspects of Earning Mobility," Econometrica, Econometric Society, vol. 46(5), pages 985-1012, September.
    2. Lorenzo Cappellari & Stephen P. Jenkins, 2004. "Modelling low income transitions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(5), pages 593-610.
    3. Levine, Daniel B & Singer, Neil M, 1970. "The Mathematical Relation Between the Income Density Function and the Measurement of Income Inequality," Econometrica, Econometric Society, vol. 38(2), pages 324-330, March.
    4. Boadway, Robin & Marchand, Maurice & Sato, Motohiro, 1998. " Subsidies versus Public Provision of Private Goods as Instruments for Redistribution," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(3), pages 545-564, September.
    5. Barrie R. Nault, 1996. "Equivalence of Taxes and Subsidies in the Control of Production Externalities," Management Science, INFORMS, vol. 42(3), pages 307-320, March.
    6. Boadway, Robin W & Wildasin, David E, 1990. "Optimal Tax-Subsidy Policies for Industrial Adjustment to Uncertain Shocks," Oxford Economic Papers, Oxford University Press, vol. 42(1), pages 105-134, January.
    7. Stéphane Mussard & Michel Terraza & Françoise Seyte, 2003. "Decomposition of Gini and the generalized entropy inequality measures," Economics Bulletin, AccessEcon, vol. 4(7), pages 1-6.
    8. Kurt Rothschild, 1985. "Some Notes on Weintraub’s Eclectic Theory of Income Shares," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 7(4), pages 575-593, July.
    9. repec:ebl:ecbull:v:4:y:2003:i:7:p:1-6 is not listed on IDEAS
    10. Esteban, Joan M, 1986. "Income-Share Elasticity and the Size Distribution of Income," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(2), pages 439-444, June.
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