Skip to main content Accessibility help
×
Home
Hostname: page-component-59b7f5684b-hd9dq Total loading time: 0.304 Render date: 2022-10-04T11:33:45.061Z Has data issue: true Feature Flags: { "shouldUseShareProductTool": true, "shouldUseHypothesis": true, "isUnsiloEnabled": true, "useRatesEcommerce": false, "displayNetworkTab": true, "displayNetworkMapGraph": false, "useSa": true } hasContentIssue true

INEQUALITY AVERSION AND THE OPTIMAL COMPOSITION OF GOVERNMENT EXPENDITURE

Published online by Cambridge University Press:  26 October 2010

John Creedy
Affiliation:
The University of Melbourne
Shuyun May Li
Affiliation:
The University of Melbourne
Solmaz Moslehi*
Affiliation:
Monash University
*
Address correspondence to: Solmaz Moslehi, Department of Economics, Monash University, Caulfield Campus, Victoria 3145, Australia; e-mail: solmaz.moslehi@gmail.com.

Abstract

This paper examines the choice between government expenditure on public goods and transfer payments, in the form of a pension, in an overlapping-generations model. Government expenditure is tax-financed on a pay-as-you-go basis. A utilitarian judge chooses expenditures to maximize a social welfare function. The nonlinear solution is found to involve the ratio of a welfare-weighted average income, which depends on the inequality aversion of the judge, to arithmetic mean income. An approximation for this ratio is found that produces explicit solutions for the optimal composition. The result is used to obtain an indication of “implicit” inequality aversion for a range of countries.

Type
Articles
Copyright
Copyright © Cambridge University Press 2010

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Aitchison, J.A. and Brown, J.A.C. (1957) The Lognormal Distribution}. Cambridge, UK: Cambridge University Press.Google Scholar
Alesina, A. and Glaeser, E.L. (2004) Fighting Poverty in the US and Europe: A World of Difference. Oxford, UK: Oxford University Press.CrossRefGoogle Scholar
Ambler, S. (2000) Optimal Time Consistent Fiscal Policy with Overlapping Generations. {Working paper}, Center for Research on Economic Fluctuations and Employment (CREFE).Google Scholar
Brent, R.J. (1984) On the use of distributional weights in cost–benefit analysis: A survey of schools. Public Finance Quarterly 12, 213230.CrossRefGoogle Scholar
Calvo, G. and Obstfeld, M. (1988) Optimal time-consistent fiscal policy with finite lifetimes: Analysis and extensions. In Helpman, E., Razin, A., and Sadka, E. (eds.), Economic Effects of the Government Budget, pp. 163198. Cambridge, MA: MIT Press.Google Scholar
Christiansen, V. and Jansen, E.S. (1978) Implicit social preferences in the Norwegian system of social preferences. Journal of Public Economics 10, 217245.CrossRefGoogle Scholar
Corneo, G. and Grüner, H.P. (2002) Individual preferences for political redistribution. Journal of Public Economics 83, 83107.CrossRefGoogle Scholar
Cragg, M. (1991) Do we care? A study of Canada's indirect tax system. Canadian Journal of Economics 24, 124143.CrossRefGoogle Scholar
Creedy, J. and Moslehi, S. (2009) Modelling the composition of government expenditure in democracies. European Journal of Political Economy 25, 4255.CrossRefGoogle Scholar
Ghiglino, C. (2000) Optimal policy in OG models. Journal of Economic Theory 90, 6283.CrossRefGoogle Scholar
Lambert, P., Millimet, D.L., and Slottje, D. (2003) Inequality aversion and the natural rate of subjective inequality. Journal of Public Economics 87, 10611090.CrossRefGoogle Scholar
Madden, D. (1992) Can we infer external effects from a study of the Irish indirect tax system? Economic and Social Review 24, 6374.Google Scholar
Madden, D. (1995) An analysis of indirect tax reform in Ireland in the 1980s. Fiscal Studies 16, 1837.CrossRefGoogle Scholar
Meltzer, A.H. and Richard, S.F. (1981) A rational theory of the size of government. Journal of Political Economy 89, 914927.CrossRefGoogle Scholar
Mera, K. (1969) Experimental determination of relative marginal utilities. Quarterly Journal of Economics 83, 464477.CrossRefGoogle Scholar
Moreh, J. (1981) Income inequality and the social welfare function. Journal of Economic Studies 8, 2537.CrossRefGoogle Scholar
Oliver, X. and Spadaro, A. (2004) Are Spanish governments really averse to inequality? A normative analysis using the 1999 Spanish tax reform. Investigaciones Económicas 28, 551556.Google Scholar
Ravallion, M. (1988) INPRES and inequality: A distributional perspective on the Centre's Regional Disbursements. Bulletin of Indonesian Economic Studies 24, 5371.CrossRefGoogle Scholar
Schwarze, J. and Härpfer, M. (2007) Are people inequality averse, and do they prefer redistribution by the state? Evidence from German longitudinal data on life satisfaction. Journal of Socio-economics 36, 233239.CrossRefGoogle Scholar
Spadaro, A. (2007) Implicit social preferences and fiscal reforms: A microsimulation analysis for Spain. Research in Labour Economics 25, 199212.CrossRefGoogle Scholar
Stern, N. (1977) Welfare weights and the elasticity of the marginal valuation of income. In Artis, M. and Nobay, R. (eds.), Studies in Modern Economic Analysis, pp. 209257. Oxford, UK: Basil Blackwell.Google Scholar
Van de Ven, J. and Creedy, J. (2005) Taxation, reranking and equivalence scales. Bulletin of Economic Research 57, 1336.CrossRefGoogle Scholar
2
Cited by

Save article to Kindle

To save this article to your Kindle, first ensure coreplatform@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.

Note you can select to save to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

INEQUALITY AVERSION AND THE OPTIMAL COMPOSITION OF GOVERNMENT EXPENDITURE
Available formats
×

Save article to Dropbox

To save this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you used this feature, you will be asked to authorise Cambridge Core to connect with your Dropbox account. Find out more about saving content to Dropbox.

INEQUALITY AVERSION AND THE OPTIMAL COMPOSITION OF GOVERNMENT EXPENDITURE
Available formats
×

Save article to Google Drive

To save this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you used this feature, you will be asked to authorise Cambridge Core to connect with your Google Drive account. Find out more about saving content to Google Drive.

INEQUALITY AVERSION AND THE OPTIMAL COMPOSITION OF GOVERNMENT EXPENDITURE
Available formats
×
×

Reply to: Submit a response

Please enter your response.

Your details

Please enter a valid email address.

Conflicting interests

Do you have any conflicting interests? *