Optimal Inequality behind the Veil of Ignorance
2013 (English)Report (Other academic)
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 / Department of Economics, Uppsala University (Online), ISSN 1653-6975 ; 2013:7
veil of ignorance, prospect theory, social welfare function, income inequality
Research subject Economics
IdentifiersURN: urn:nbn:se:uu:diva-199754OAI: oai:DiVA.org:uu-199754DiVA: diva2:621065