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MSc Public Economics 2011/12

http://darp.lse.ac.uk/ec426

Welfare Analysis of State InterventionWelfare Analysis of State Intervention

Frank A. Cowell Frank A. Cowell

3 October 2011

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Introduction Two key questionsTwo key questions

1. Why Public Economics?1. Why Public Economics? 2. What role for government in the economy?2. What role for government in the economy?

Answers to 1:Answers to 1: economic issues that involve cooperative rather than purely individualistic economic issues that involve cooperative rather than purely individualistic

approachapproach interrelation with social and political analysisinterrelation with social and political analysis

Answers to 2:Answers to 2: management of economic mechanismsmanagement of economic mechanisms manipulation of environment in which mechanisms operatemanipulation of environment in which mechanisms operate

This lecture:This lecture: focus on the underlying welfare economics to these answersfocus on the underlying welfare economics to these answers examine the underlying motivation for concern with redistributionexamine the underlying motivation for concern with redistribution foundation for lectures on distributional comparisons, on policy designfoundation for lectures on distributional comparisons, on policy design

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Management of mechanisms Where the private model doesn’t “work”Where the private model doesn’t “work”

sometimes called “market failure”sometimes called “market failure” useful to look at the separate reasons whyuseful to look at the separate reasons why

A typology of difficulties:A typology of difficulties:1.1. Market deficiencyMarket deficiency2.2. NonconvexitiesNonconvexities3.3. ExternalitiesExternalities4.4. Public consumptionPublic consumption

Perhaps only the first two are really “failure”Perhaps only the first two are really “failure” violations of first or second “welfare theorems”violations of first or second “welfare theorems” informational problemsinformational problems

But all 1,…,4 provide a normative role for public economicsBut all 1,…,4 provide a normative role for public economics all of these addressed in the coming lecturesall of these addressed in the coming lectures characterisation issue (how solution differs from private –sector outcome)characterisation issue (how solution differs from private –sector outcome) implementation issue (how to design a mechanism)implementation issue (how to design a mechanism)

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Manipulation of environment Standard micro model takes as given:Standard micro model takes as given:

resource allocationresource allocation system of rightssystem of rights institutionsinstitutions

Raises several questionsRaises several questions can the government modify the above?can the government modify the above? motive for doing this?motive for doing this? mechanism for accomplishing it?mechanism for accomplishing it? costs involved?costs involved?

In this lectureIn this lecture focus on resource allocationfocus on resource allocation what is basis for interfering with it?what is basis for interfering with it? how to formulate a set of principles?how to formulate a set of principles?

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Overview...Framework of analysis

Welfare, utility, income

The basis for redistribution

Responsibility & redistribution

Welfare Analysis of Public Economics

Roots in welfare economics

The basis for values

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An efficiency-equity “trade-off” What is efficiency?What is efficiency?

PE provides a criterion for the goal of efficiency itselfPE provides a criterion for the goal of efficiency itself Pareto criterion gives no guidance away from efficient pointPareto criterion gives no guidance away from efficient point standard approach to gains/losses based on potential efficiencystandard approach to gains/losses based on potential efficiency a criterion for applications in Public Economics such as tax designa criterion for applications in Public Economics such as tax design

What is equity?What is equity? raises issues of definitionraises issues of definition also of the case for egalitarianism also of the case for egalitarianism (Putterman et al. 1998))

Is there necessarily a trade-off?Is there necessarily a trade-off? Not if we can redistribute resources without transactions costNot if we can redistribute resources without transactions cost

but this is only possible with lump-sum transfersbut this is only possible with lump-sum transfers encounter informational problemsencounter informational problems

Use welfare economics to give meaning to the trade-off:Use welfare economics to give meaning to the trade-off:

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Welfare approaches The constitutionThe constitution

the fundamental approach to deriving “social preferences”the fundamental approach to deriving “social preferences” uses peoples’ orderings of social state including attitude to redistributionuses peoples’ orderings of social state including attitude to redistribution runs into problem of Arrow theorem (Arrow 1963, runs into problem of Arrow theorem (Arrow 1963, Blau 1972)) a constitution satisfying Unrestricted domain, Pareto unanimity, a constitution satisfying Unrestricted domain, Pareto unanimity,

Independence of Irrelevant Alternatives must be dictatorialIndependence of Irrelevant Alternatives must be dictatorial Is the approach hopelessly indecisive? Is the approach hopelessly indecisive?

there’s no clear imperative for actionthere’s no clear imperative for action but will give insight in later lecture on difficulties of implementationbut will give insight in later lecture on difficulties of implementation

Way forward?Way forward? impose more structure on the problemimpose more structure on the problem

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Welfarism Welfarism: a more restrictive view of welfare comparisonsWelfarism: a more restrictive view of welfare comparisons

requires that evaluation of social states ignore all non-utility informationrequires that evaluation of social states ignore all non-utility information an implication of Unrestricted domain, Pareto unanimity, Independence an implication of Unrestricted domain, Pareto unanimity, Independence

of Irrelevant Alternatives (of Irrelevant Alternatives (Sen 1979)) Usually a strong informational structure is imposedUsually a strong informational structure is imposed

cardinally measurablecardinally measurable interpersonally comparableinterpersonally comparable

Provides the basis for a coherent modelProvides the basis for a coherent model widely used in modern approaches to compensation and responsibility (widely used in modern approaches to compensation and responsibility (

Fleurbaey and Maniquet 2007)) problems if you drop welfarism problems if you drop welfarism (Kaplow and Shavell 2001)

Welfarism usually based on a simple model of individual utilityWelfarism usually based on a simple model of individual utility utility based on resources? utility based on resources? need to examine the basic building blocks…need to examine the basic building blocks…

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Overview...Framework of analysis

Welfare, utility, income

The basis for redistribution

Responsibility & redistribution

Welfare Analysis of Public Economics

The basic units of analysis

The basis for values

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Models of resources Resources allocated among individualsResources allocated among individuals

nn individuals individuals n n = 2 (Irene and Janet) works for many welfare problems= 2 (Irene and Janet) works for many welfare problems needneed n n 3 persons for the inequality problem 3 persons for the inequality problem

Models 1,2: cake-sharingModels 1,2: cake-sharing fixed total incomefixed total income but what about economic growth?but what about economic growth? costlessly transferable incomes… costlessly transferable incomes… ……important for first-best welfare economicsimportant for first-best welfare economics

Model 3: general case with productionModel 3: general case with production incorporates incentive effectsincorporates incentive effects transfers allow for the “leaky bucket” problem (Okun 1975)transfers allow for the “leaky bucket” problem (Okun 1975)

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Welfare and utility... What properties does utility have?What properties does utility have?

Is it (cardinally) measurable?Is it (cardinally) measurable? Is it comparable?Is it comparable? (properties are independent)(properties are independent)

Model 1: Model 1: = = UU((yy;; a a)) individualistic utility depends on income individualistic utility depends on income yy and attributes and attributes aa may not be comparable, depends on information about may not be comparable, depends on information about aa

Models 2,3: Models 2,3: = = UU((y, Fy, F)) FF: distribution function of income: distribution function of income Concern for distribution as a kind of externalityConcern for distribution as a kind of externality Evidence that people are concerned about relative Evidence that people are concerned about relative

incomes (incomes (Ferrer-i-Carbonell 2005, , Senik 2008)) Could we Could we use use incomeincome as a proxy for utility? as a proxy for utility?

Is it unique and well-defined?Is it unique and well-defined? How comprehensive should it be?How comprehensive should it be? What is the relevant receiving unit?What is the relevant receiving unit?

Measurability without comparability:Imagine a world where utility is proportional to income, but the constant of proportionality is known to depend on family characteristics which may be unobservable. Double a family’s income and you double each member’s utility; but you cannot compare utilities of persons from different families.

Example 1

Comparability without measurability :Imagine a world where access to public services determines utility and the following ordering is recognised:•Gas+Electricity•Electricity only•Gas only•NeitherIt makes no sense to say “U(G+E) =2U(E)”, but you could still compare individuals.

Example 2

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Utility and income: cardinality

U(y)

income

utili

ty

y

Û(y)

The simple function UChange preferences: φ is a concave function of U.

Risk aversion increases.

More concave implies higher risk aversion Example: the iso-elastic form: y1 – – 1U(y) = ———— , 1 – index of risk aversion, , may take on a welfare significance

income and utility only equivalent where = 0

lower risk aversion

higher risk aversion

Û= φ(U)

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Utility and income: comparability Adjust for needs using an Adjust for needs using an equivalence scaleequivalence scale:: x x = = ( ( yy, , aa) )

aa: personal attributes (identity, needs, abilities…): personal attributes (identity, needs, abilities…) yy: conventionally defined real income: conventionally defined real income xx: equivalised income (money-metric utility): equivalised income (money-metric utility)

Special case – income-independent equivalence scaleSpecial case – income-independent equivalence scale xx = = yy / / ((aa) where ) where is number of equivalent adultsis number of equivalent adults

Where does the function Where does the function come from? come from? official government sourcesofficial government sources bodies such as OECDbodies such as OECD models of household budgetsmodels of household budgets

Example: adjusting for needExample: adjusting for need plot share of food in budget against incomeplot share of food in budget against income a reference household type… a reference household type… Engel Equivalence ScaleEngel Equivalence Scale

childless couple

couple with children

x, y

yixi

sfood

income

prox

y fo

r “ne

ed”

From budget studies

xr yr

0

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Overview...Framework of analysis

Welfare, utility, income

The basis for redistribution

Responsibility & redistribution

Welfare Analysis of Public Economics

Philosophies, social welfare and the basis for intervention

The basis for values

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Utility-possibility set Two persons

Utility-possibility set 1

Jane

t’s in

com

e

Irene’s income045°

Cake-sharing income-possibility set

income distributions with given total

i

U is strictly concave Same U for Irene and Janet

Case 1: cake sharing, independent. = U(y)

Utility-possibility set 2

Case 2: cake sharing, interdependent. = U(y, F)

ray o

f equali

ty

Utility-possibility set 3

Case 3: production, interdependent. = U(y, F)

j

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Entitlement approach Focus on Nozick (1974)Focus on Nozick (1974) Answer depends on how Answer depends on how status quostatus quo came about came about Distinguish three key issues:Distinguish three key issues:

fairness in original acquisitionfairness in original acquisition fair transfersfair transfers rectification of past injusticerectification of past injustice

Little or no role for the State?Little or no role for the State? ““Night watchman”Night watchman”

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End-state ParetoPareto unanimity criterion is an end-state principle unanimity criterion is an end-state principle

Approve the move from status quo to another point…Approve the move from status quo to another point… ……if at least one person gains and no-one loseif at least one person gains and no-one losess

Individualistic, based on utilitiesIndividualistic, based on utilities utility may have a complicated relationship with incomeutility may have a complicated relationship with income depend on the income of others?depend on the income of others?

Pareto criterion can be indecisivePareto criterion can be indecisive alternatively, use a social welfare functionalternatively, use a social welfare function what principles should this embody?what principles should this embody?

BenthamBentham: “Seek the greatest good of the greatest number”: “Seek the greatest good of the greatest number” interpreted as max sum of individual welfareinterpreted as max sum of individual welfare 1 1 22nn

Much of public economics uses utilitarianism Much of public economics uses utilitarianism efficiency criteriaefficiency criteria sacrifice theories in taxationsacrifice theories in taxation a basis for egalitarian transfers?a basis for egalitarian transfers?

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Nozick, Pareto, Bentham

045°

i

j

Will cooperative parties act as Paretians? Leads to multiple solutions Is this what would happen under Nozick? No case for state intervention?

ray o

f equali

ty B

N

The status quo

Feasible points that Pareto-dominate N

Pareto improvements

A possible voluntary solution The set of 2-person voluntary solutions Benthamite solution

Benthamite contours are 45º lines Benthamite solution is unique But (in this case) not equal Maybe outside set of cooperative solutions

C

C'

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Nozick, Pareto, Bentham: discussion A motive for changing distribution?A motive for changing distribution?

Nozickians might insist that no move from N is justifiedNozickians might insist that no move from N is justified unless it came through private voluntary actionunless it came through private voluntary action applies even to C applies even to C

ImplementationImplementation Private voluntary action might not be able to implement CPrivate voluntary action might not be able to implement C Could rise if there were many individualsCould rise if there were many individuals

Case for egalitarianism?Case for egalitarianism? Bentham approach not usually imply egalitarian outcomeBentham approach not usually imply egalitarian outcome

Consider two further alternative approaches:Consider two further alternative approaches: Concern for the least advantaged (Rawls)Concern for the least advantaged (Rawls) EgalitarianismEgalitarianism

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The Rawls approach Rawls’ (1971) distributional philosophy based on two principles:Rawls’ (1971) distributional philosophy based on two principles:

1.1. each person has equal right to the most extensive scheme of equal basic each person has equal right to the most extensive scheme of equal basic liberties compatible with a similar scheme of liberties for allliberties compatible with a similar scheme of liberties for all

2.2. society should so order its decisions as to secure the best outcome for the society should so order its decisions as to secure the best outcome for the least advantagedleast advantaged

Economic focus has usually been on 2Economic focus has usually been on 2 Argument based on reasoning behind a “veil of ignorance”Argument based on reasoning behind a “veil of ignorance” I do not know which position in society I have when making social judgmentI do not know which position in society I have when making social judgment

Needs careful interpretationNeeds careful interpretation Avoid confusion with probabilistic approach laterAvoid confusion with probabilistic approach later

What is meant by the difference principle?What is meant by the difference principle? Often interpreted as maximising utility of the worst-off : min Often interpreted as maximising utility of the worst-off : min

{{1122nn}} Based on simplistic interpretation of veil of ignorance argumentBased on simplistic interpretation of veil of ignorance argument Rawls interpreted it differently, but rather vaguelyRawls interpreted it differently, but rather vaguely

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Egalitarianism? Origin goes back to Plato…Origin goes back to Plato… ……but reinterpreted by Meade (1974)but reinterpreted by Meade (1974)

““Superegalitarianism”Superegalitarianism” Welfare is perceived in terms of pairwise Welfare is perceived in terms of pairwise differencesdifferences: :

[[iijj]... ]... Welfare might not be expressible as a neat additive Welfare might not be expressible as a neat additive

expression involving individual utilitiesexpression involving individual utilities Finds an echo in more recent welfare developmentsFinds an echo in more recent welfare developments Related to concepts of deprivationRelated to concepts of deprivation

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Max-min & egalitarianism

045°

i

j

Contours of max-min are L-shaped Max-min optimum at R (not on diagonal) Maxi-min does not imply equality

ray o

f equali

ty

N

The status quo

Superegalitarianism

Max-min outcome

Superegalitarian contours are V-shaped May get equality with superegalitarianism But E is Pareto-dominated

R

E

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A general class of SWF We could just use a weaker individualistic formWe could just use a weaker individualistic form

Bergson-Samuelson formulation (Bergson-Samuelson formulation (Bergson 1938, Samuelson 1947), Samuelson 1947) WW((1 1 22nn))

Specific welfare functions are special cases of this Specific welfare functions are special cases of this many (not superegalitarianism) have additive form many (not superegalitarianism) have additive form uu((11) ) uu((22) ) uu((nn) ) take take uu as a ``social utility” or “evaluation” function as a ``social utility” or “evaluation” function

Again useful to take the Again useful to take the iso-elasticiso-elastic form of form of uu:: 1 – 1 – –– 1 1

uu(() = ) = ————— , ————— , 1 – 1 –

Bentham corresponds to the case Bentham corresponds to the case Max-min (“Rawls”) corresponds to the case Max-min (“Rawls”) corresponds to the case Intermediate cases (0 Intermediate cases (0 ) are interesting too) are interesting too

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General SWF

W R

E

B. Benthamite ( 0)

W. Intermediate ()

R. 'Rawlsian' ( )

E. ‘Superegalitarianism' (no value)

B

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Overview...Framework of analysis

Welfare, utility, income

The basis for redistribution

Responsibility & redistribution

Welfare Analysis of Public Economics

A reinvention of utilitarianism?

The basis for values

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Where do values in SWF come from?

Consensus?Consensus? Again the problem of the “Arrow Theorem...”Again the problem of the “Arrow Theorem...”

Personal concern for distribution Personal concern for distribution = = UU((y, Fy, F)) people may have two sets of values, private and publicpeople may have two sets of values, private and public may treat distribution as a “public good” (may treat distribution as a “public good” (Hochman and Rodgers 1969))

The PLUM principleThe PLUM principle ““People Like Us Matter” – (Champernowne and Cowell 1998)People Like Us Matter” – (Champernowne and Cowell 1998) interest groups determine SWF – will they be consistent?interest groups determine SWF – will they be consistent?

Based on individual rationality under uncertaintyBased on individual rationality under uncertainty argument by analogy between welfare and risk analysis (argument by analogy between welfare and risk analysis (Atkinson 1970)) ssocial welfare based on individual utility (ocial welfare based on individual utility (Harsanyi Harsanyi 1953, , 1955)) argument consists of two strands (argument consists of two strands (Amiel et al 2009))

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Harsanyi 1: Aggregation theorem Consider preferences over set of lotteries Consider preferences over set of lotteries LL

think of lotteries concerning life prospectsthink of lotteries concerning life prospects individuals’ preferences individuals’ preferences VVii satisfy EU axioms satisfy EU axioms i i =1,…,=1,…,nn social preference social preference VV satisfies EU axioms satisfies EU axioms

Assume Pareto indifference is satisfiedAssume Pareto indifference is satisfied Then there are numbers Then there are numbers ii and and such that, for all such that, for all ppLL

1 1 nnVV((pp) =) = ― ― ii VVii((pp) + ) +

n n ii=1=1 Powerful resultPowerful result

does does notnot assume interpersonal utility comparisons. assume interpersonal utility comparisons. ii are based on “the evaluator’s” value judgments ( are based on “the evaluator’s” value judgments (Harsanyi 1978, p. 227), p. 227) evaluator: “Judges and other public officials” (1978, p. 226)evaluator: “Judges and other public officials” (1978, p. 226) need not be a member of the societyneed not be a member of the society

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Harsanyi 2: Impartial observer theorem Observer sympathetic to the interests of each member of societyObserver sympathetic to the interests of each member of society

makes value judgmentsmakes value judgments assumes interpersonal comparisons of utility assumes interpersonal comparisons of utility (Vickrey 1945)

The observer The observer jj is to imagine himself being person is to imagine himself being person ii ii’s objective circumstances’s objective circumstances ii’s preferences’s preferences

To get a representative person, continue the thought experimentTo get a representative person, continue the thought experiment jj imagines he has an equal chance of being any person in society imagines he has an equal chance of being any person in society equal consideration to each person’s interests.equal consideration to each person’s interests.

Impartial observer Impartial observer j j calculates average EU of each lottery in calculates average EU of each lottery in LL: : 1 1 nnVVj j ((pp) =) = ― ― VVi i ((pp)) n n ii=1=1

I.e. person I.e. person jj’s expected utility’s expected utility

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Implications of Harsanyi The aggregation theorem gives an argument for additivityThe aggregation theorem gives an argument for additivity Reinterpret the sum-of-utilities approachReinterpret the sum-of-utilities approach

equivalent to: (1/equivalent to: (1/nn))1 1 + (1/+ (1/nn))22(1/(1/nn))nn

reinterpreted as reinterpreted as pp111 1 + + pp2222ppnnnn, where , where ppi i := 1/:= 1/nn this is simply expected utilitythis is simply expected utility

The “representative person” induces a probabilistic approachThe “representative person” induces a probabilistic approach Then Then socialsocial welfare is inherited from welfare is inherited from individualindividual expected utility expected utility

……the analysis of impersonal value judgments concerning social welfare the analysis of impersonal value judgments concerning social welfare seems to suggest a seems to suggest a close affinity between the cardinal utility concept of close affinity between the cardinal utility concept of welfare economics and the cardinal utility concept of theory of choices welfare economics and the cardinal utility concept of theory of choices involving risk involving risk (Harsanyi 1953)

Some questions:Some questions: on what basis do we get the probabilities here? on what basis do we get the probabilities here? is “expectations” an appropriate basis for social choice?is “expectations” an appropriate basis for social choice?

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Harsanyi: Some difficulties Are preferences known behind the “Veil of ignorance”?Are preferences known behind the “Veil of ignorance”?

not in the Rawls approachnot in the Rawls approach but Harsanyi assumes that representative person knows others’ utilitiesbut Harsanyi assumes that representative person knows others’ utilities

Model assumes equal probabilityModel assumes equal probability independent of income, wealth, social position etcindependent of income, wealth, social position etc do people have prior information?do people have prior information? Subjective probabilities may be inconsistentSubjective probabilities may be inconsistent

Do people view risk and distributional choices in the same way? Do people view risk and distributional choices in the same way? Cowell and Schokkaert (2001) Carlsson et al (2005) Kroll and Davidovitz (2003)

Should we be concerned only with expected utility?Should we be concerned only with expected utility? Should we take account of more information Should we take account of more information

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A difficulty with expected utility?

Suppose the outcomes depend on uncertain eventsSuppose the outcomes depend on uncertain events probabilities of events 1,2 are (probabilities of events 1,2 are (p,p, 1 1 pp) )

Payoffs for persons (Payoffs for persons (i,ji,j) under two policies are ) under two policies are

PolicyPolicy Event 1Event 1 Event 2Event 2

Consider choice between policies Consider choice between policies and and Dimo967)) Expected payoffs are:Expected payoffs are:

under under : (1,0): (1,0) under under : (: (p,p, 1 1 pp))

Should society be indifferent between Should society be indifferent between and and ? ? MobilityMobility may be important as well as expected outcome may be important as well as expected outcome

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Views on distribution depend on (i) your current position and (ii) your expectations (Ravallion and Lokshin 2000)

Alesina and Giuliano (2009) confirm this for US (GSS) and show confirm this for US (GSS) and show importance of perceived fairnessimportance of perceived fairness

Income may not be over-riding concern (Ohtake and Tomioka 2004) But more than self-interest is at work (Fong 2001))

Views on redistribution

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Overview...Framework of analysis

Welfare, utility, income

The basis for redistribution

Responsibility & redistribution

Welfare Analysis of Public Economics

What should be equalised?

The basis for values

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Responsibility and redistribution Take account of individual responsibility? Take account of individual responsibility?

role of individual actions – “responsibility cut” role of individual actions – “responsibility cut” affect the case for redistributionaffect the case for redistribution affect the evaluation of redistributionaffect the evaluation of redistribution differentiate between characteristics for which people can be held responsible and differentiate between characteristics for which people can be held responsible and

othersothers

Each person Each person ii has a vector of attributes has a vector of attributes a aii:: Attributes partitioned into two classesAttributes partitioned into two classes RR-attributes: responsibility characteristics-attributes: responsibility characteristics CC-attributes: compensation characteristics-attributes: compensation characteristics

Situation before intervention determined by income function Situation before intervention determined by income function ff ff maps attributes into incomes maps attributes into incomes ff((aaii)) only person only person ii’s attributes involved’s attributes involved

Situation after intervention determined by distribution rule Situation after intervention determined by distribution rule FF FF maps profile of attributes maps profile of attributes aa into income of each person into income of each person ii feasible: feasible: kk FFkk((aa) = ) = kk ff((aakk)) anonymous: if anonymous: if aai i = = aajj then then FFii((aa) = ) = FFjj((aa))

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Responsibility Principles 1. 1. EEqual qual IIncome for ncome for EEqual qual RR-attributes-attributes

focus on distribution itselffocus on distribution itself if if aaii

RR = = aajj

RR then then FFii((aa) = ) = FFjj((aa))

2. 2. EEqual qual TTransfers for ransfers for EEqual qual CC-attributes-attributes focus on changes in distributionfocus on changes in distribution if if aaii

CC = = aajj

CC then then FFii((aa) – ) – ff((aaii) = ) = FFjj((aa) – ) – ff((aajj) )

ProblemProblem ( (Bossert and Fleurbaey 1996):): EIER and ETEC are incompatible except in the special caseEIER and ETEC are incompatible except in the special case ff((aaii) = ) = gg((aaii

RR) + ) + hh((aaiiCC) )

In this special case, a natural redistribution mechanismIn this special case, a natural redistribution mechanism FFii

00((aa) = ) = gg((aaiiRR) + ) + (1/(1/nn)) kk hh((aaii

CC))

In general case we need a compromise…In general case we need a compromise…

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Compromises 1. Egalitarian-equivalent mechanisms

FFiiEEEE((aa) = ) = ff((aaii

RR, , aa*C*C) – ) – TT TT := (1/ := (1/nn) ) kk [ [ ff((aakk

RR, , aa*C*C) – ) – ff((aakk)])] insist on full adjustment (EIER) but weaken ETEC

2. Conditionally-egalitarian mechanisms FFii

CECE((aa) = ) = ff((aaii) – ) – ff((aa*R*R, , aaiiCC) + ) + GG

GG := (1/ := (1/nn) ) kk ff((aa*R*R, , aakkCC) )

insist on strict compensation (ETEC) but weaken EIER Both compromises use reference characteristics (R or C)

1. Everyone gets income equal to the pre-redistribution earnings given reference characteristics plus uniform transfer

2. Everyone guaranteed average income of a hypothetical economy Gaertner and Schokkaert (2012) show that there is

considerable support for such intermediate positions

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Concluding remarks A model with an individualistic base for welfare comparisonsA model with an individualistic base for welfare comparisons Alternative social philosophies may support redistributive Alternative social philosophies may support redistributive

arguments arguments But it raises some awkward questions...But it raises some awkward questions... Should the Should the socialsocial basis for redistribution rest on basis for redistribution rest on privateprivate tastes tastes

for equality or aversion to misery? for equality or aversion to misery? What if people What if people likelike seeing the poor..? seeing the poor..?

Should it rest on individual attitudes to risk?Should it rest on individual attitudes to risk? What if people are not risk-averse?What if people are not risk-averse?

How should we distinguish between the factors that warrant How should we distinguish between the factors that warrant redistribution and those that don’t?redistribution and those that don’t?

We will come back to consider the implications of these We will come back to consider the implications of these questionsquestions

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References 1 **Alesina, A, F. and Giuliano, P. (2009) “Preferences for Redistribution,” “Preferences for Redistribution,” NBER

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