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Optimal Inequality behind the Veil of Ignorance

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  • Liang, Che-Yuan

    (Department of Economics)

Abstract

In Rawls’ (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 (1953, 1955, 1975) treats this situation as a decision under risk and arrives at utilitarianism using expected utility theory. This paper investigates the implications of applying 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 socially desirable. The optimal inequality result contrasts the implications of other social welfare criteria.

Suggested Citation

  • Liang, Che-Yuan, 2013. "Optimal Inequality behind the Veil of Ignorance," Working Paper Series 2013:7, Uppsala University, Department of Economics.
    • Handle: RePEc:hhs:uunewp:2013_007
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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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