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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.
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 / Department of Economics, Uppsala University (Online), ISSN 1653-6975 ; 2013:7
Keyword [en]
veil of ignorance, prospect theory, social welfare function, income inequality
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Research subject
URN: urn:nbn:se:uu:diva-199754OAI: diva2:621065
Available from: 2013-05-13 Created: 2013-05-13 Last updated: 2013-05-13Bibliographically approved

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Liang, Che-yuan
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Department of Economics

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