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Optimal Inequality behind the Veil of Ignorance
Uppsala University, Disciplinary Domain of Humanities and Social Sciences, Faculty of Social Sciences, Department of Economics, Uppsala Center for Fiscal Studies.
2013 (English)Report (Other academic)
Abstract [en]

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.

Place, publisher, year, edition, pages
Uppsala: Uppsala universitet, 2013. , 26 p.
Working paper / Uppsala Center for Fiscal Studies, Uppsala University, 2013:4
Keyword [en]
veil of ignorance, prospect theory, social welfare function, income inequality
National Category
Research subject
URN: urn:nbn:se:uu:diva-199019OAI: diva2:619210
Available from: 2013-05-02 Created: 2013-05-02 Last updated: 2013-05-02Bibliographically approved

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Liang, Che-Yuan
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Uppsala Center for Fiscal Studies

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