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Risk Aversion, Inequality Aversion and Optimal Choice of Distributions

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  • Fraser, Clive D

Abstract

This paper considers explicitly costly choice between mean-preserving distributions and a random variable. First, we extend a theorem of Diamond-Rothchild-Stiglitz to our environment. We then apply the result to risk and inequality analysis. W.r.t the former, we generalise Ehrlich and Becker's seminal analysis of self-protection. W.r.t the latter, we establish a sufficient condition for lump-sum-tax-financed and proportional tax-financed expenditure upon reducing inequality in pre-tax income or abilities to increase with society's absolute inequality aversion. This requires everyone's relative inequality aversion to lie within the interval [1,2]. We draw upon empirical evidence to show : Norway may satisfy this requirement ; the U.S. may not. Additionally, we examine the impact of variations in national income upon proportional tax-financed inequality reduction.

Suggested Citation

  • Fraser, Clive D, 1983. "Risk Aversion, Inequality Aversion and Optimal Choice of Distributions," The Warwick Economics Research Paper Series (TWERPS) 245, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:245
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    File URL: https://warwick.ac.uk/fac/soc/economics/research/workingpapers/1978-1988/twerp245.pdf
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