On the Inefficiency of Inequality
A number of studies have examined the implications of preference interdependence. This paper models individual utility as depending either on the level of other people's consumption or on the difference in consumption levels. It assumes that t...
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| Language: | English en_US |
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World Bank, Washington, D.C.
2013
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| Online Access: | http://documents.worldbank.org/curated/en/2004/07/4986983/inefficiency-inequality http://hdl.handle.net/10986/14170 |
| Summary: | A number of studies have examined the
implications of preference interdependence. This paper
models individual utility as depending either on the level
of other people's consumption or on the difference in
consumption levels. It assumes that the impact of an
increase in other people's consumption on individual
utility diminishes with the level of consumption, raising
individual utility when that consumption is very small and
lowering it when that consumption is very large. Based on
that plausible assumption, the paper shows that, whether
individual utility depends on the level of other
people's consumption or on the difference in
consumption levels, i) welfare declines with inequality, ii)
equilibrium inequality is inefficient, and iii) the optimal
intervention leads to a more equal distribution.
Implications for the role of development institutions are examined. |
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