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Equity aversion, inequality aversion and economic welfare: On the macroeconomic substantiation of microeconomic utility functions

Author

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  • Sell, Friedrich L.
  • Stratmann, Felix

Abstract

In this paper, we first model the dynamics of an economy, making use of a simple, almost trivial circular flow analysis. Then, we demonstrate the effects of "keeping up with the Joneses" as well as of "keeping ahead of the Smiths" in private consumption and the role of innovation and imitation for private investment and economic growth. In either case, we detect both a tendency towards convergence (inequity aversion) and towards divergence (equity aversion) in the macro economy. On the background of the macroeconomic analysis we then turn to a microeconomic view and discuss how the characteristics, functions and findings of selected fairness models which include social preferences change when "equity aversion" is integrated into the theoretical framework. Thereafter, the collected results of both micro and macroeconomic analysis allow us to draw a series of conclusions concerning economic policy in different areas.

Suggested Citation

  • Sell, Friedrich L. & Stratmann, Felix, 2009. "Equity aversion, inequality aversion and economic welfare: On the macroeconomic substantiation of microeconomic utility functions," Working Papers in Economics 2009,2, Bundeswehr University Munich, Economic Research Group.
  • Handle: RePEc:zbw:ubwwpe:20092
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    More about this item

    Keywords

    economic welfare; inequity aversion; fairness concepts;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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