An adverse social welfare consequence of a rich-to-poor income transfer: A relative deprivation approach

A transfer from a richer individual to a poorer one seems to be the most intuitive and straightforward way of reducing income inequality in a society. However, can such a transfer reduce the welfare of the society? We show that a rich-to-poor transfer can induce a response in the individuals’ behaviors which actually exacerbates, rather than reduces, income inequality as measured by the Gini index. We use this result as an input in assessing the social welfare consequence of the transfer. Measuring social welfare by Sen’s social welfare function, we show that the transfer reduces social welfare. These two results are possible even for individuals whose utility functions are relatively simple (namely, at most quadratic in all terms) and incorporate a distaste for low relative income. We first present the two results for a population of two individuals. We subsequently provide several generalizations. We show that our argument holds for a population of any size, and that the choice of utility functions which trigger this response is not singular - the results obtain for an open set of the space of admissible utility functions. In addition, we show that a rich-to-poor transfer can exacerbate inequality when we employ Lorenz-domination, and that it can decrease social welfare when we draw on any increasing, Schur-concave welfare function

Is a Minimum Wage an Appropriate Instrument for Redistribution?

We analyse the redistributional (dis)advantages of a minimum wage over income taxation in competitive labour markets without imposing assumptions on the (in)efficiency of labour rationing. Compared to a distributionally equivalent tax change, a minimum-wage increase raises involuntary unemployment, but also raises skill formation as some individuals avoid unemployment. A minimum wage is an appropriate instrument for redistribution if and only if the public revenue gains from additional skill formation outweigh both the public revenue losses from additional unemployment and the utility losses of inefficient labour rationing. We show that this critically depends on how labour rationing is distributed among workers. A necessary condition for the desirability of a minimum-wage increase is that the public revenue gains from higher skill formation outweigh the revenue losses from higher unemployment. We write this condition in terms of measurable sufficient statistics

Who Needs Good Neighbours?

Abstract: Due to the increasing spatial dispersion of social networks, the association between neighbor relationships and quality of life has become more uncertain. Our analysis used instrumental variable modelling to reduce bias associated with residual confounding and reverse causation, in order to provide a more reliable examination of the effect of interaction with neighbors on subjective well-being than previous work. While the frames of reference for individuals’ socializing may have shifted outside the neighborhood, our analysis provides robust evidence that interaction with neighbors still matters a great deal for subjective well-being. A further important question to ask is if neighboring does affect well-being, then are there certain groups in society for whom contact with neighbors matters more? Our analysis suggests that there are, namely for those in a relationship, unemployed or retired. This means that while fostering contact with neighbors has the potential to significantly improve individual well-being, such policy efforts are likely to matter a good deal more in neighborhoods with relatively large numbers of geographically constrained social groups, such as the elderly and the unemployed. Key words: subjective well-being, neighborly interaction, social capita

Can a concern for status reconcile diverse social welfare programs?

Let there be two individuals: “rich,” and “poor.” Due to inefficiency of the income redistribution policy, if a social planner were to tax the rich in order to transfer to the poor, only a fraction of the taxed income would be given to the poor. Under such inefficiency and a standard utility specification, a Rawlsian social planner who seeks to maximize the utility of the worst-off individual will select a different allocation of incomes than a utilitarian social planner who seeks to maximize the sum of the individuals’ utilities. However, when individuals prefer not only to have more income but also not to have low status conceptualized as low relative income, and when this distaste is incorporated in the individuals’ utility functions with a weight that is greater than a specified critical level, then a utilitarian social planner will select the very same income distribution as a Rawlsian social planner

So Far So Good: Age, Happiness, and Relative Income

In a simple 2-period model of relative income under uncertainty, higher comparison income for the younger cohort can signal higher or lower expected lifetime relative income, and hence either increase or decrease well-being. With data from the German Socio-Economic Panel and the British Household Panel Survey, we first confirm the standard negative effects of comparison income on life satisfaction with all age groups, and many controls. However when we split the West German sample by age we find a positive significant effect of comparison income in the under 45s, and the usual negative effect only in the over 45 group. With the same split in UK and East German data, comparison income loses significance, which is consistent with the model prediction for the younger group. Our results provide first evidence that the standard aggregation with only a quadratic control for age can obscure major differences in the effects of relative income

Positional Income Concerns: Prevalence and Relationship with Personality and Economic Preferences

This paper presents detailed evidence about who compares to whom in terms of relative income. We rely on representative survey data on the importance of income comparisons vis-á-vis seven reference groups, allowing us to exploit within-subject heterogeneity. We explore the prevalence and determinants of positional income concerns, investigating the role of personality and economic preferences. Our results establish robust relationships between positional income concerns and the personality traits agreeableness, conscientiousness, and neuroticism, some of which depend on the reference group. Furthermore, risk and fairness preferences are significantly correlated with positional income concerns

A Nonbehavioral Theory of Saving

We present a model where the saving rate of the household sector, especially households at the bottom of the income distribution, becomes the endogenous variable that adjusts in order for full employment to be maintained over time. An increase in income inequality and the current account deficit and a consolidation of the government budget lead to a decrease in the saving rate of the household sector. Such a process is unsustainable because it leads to an increase in the household debt-to-income ratio, and maintaining it depends on some sort of asset bubble. This framework allows us to better understand the factors that led to the Great Recession and the dilemma of a repeat of this kind of unsustainable process or secular stagnation. Sustainable growth requires a decrease in income inequality, an improvement in the external position, and a relaxation of the fiscal stance of the government