Constraints on profit income distribution and production efficiency in private ownership economies with Ramsey taxation

Author's draft published as discussion paper by University of Exeter Department of Economics. The original publication is available at www.springerlink.comIn economies with Ramsey taxation, decreasing returns to scale, and private ownership, we show that second-best production efficiency is desirable when the grouping of private firms induced by the profit taxation power of the government is at least as fine as the grouping of firms induced by the institutional rules of profit distribution in the economy. The classic results of Dasgupta and Stiglitz [1972] (of firm-specific profit taxation) and Diamond and Mirrlees [1971] and Guesnerie [1995] (of uniform one-hundred percent profit taxation) follow as special cases of our model. Moreover, second-best analysis shows that optimal profit taxation is a substitute for optimal intermediate input taxation. In smooth economies, proportional, lump-sum, and affine modes of profit taxation are equivalent. We rework Mirrlees [1972] counterexample, which is posed in the context of a non-smooth economy, to show that second-best production efficiency continues to remain desirable under an affine structure of profit taxation

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

The determinants of vulnerability to currency crises: country-specific factors versus regional factors

We investigate the determinants of exchange market pressures (EMP) for some new EU member states at both the national and regional levels, where macroeconomic and financial variables are considered as potential sources. The regional common factors are extracted from these variables by using dynamic factor analysis. The linear empirical analysis, in general, highlights the importance of country-specific factors to defend themselves against vulnerability in their external sectors. Yet, given a significant impact of the common component in credit on EMP, a contagion effect is apparent through the conduit of credit market integration across these countries under investigation

Priority for the Worse Off and the Social Cost of Carbon

The social cost of carbon (SCC) is a monetary measure of the harms from carbon emission. Specifically, it is the reduction in current consumption that produces a loss in social welfare equivalent to that caused by the emission of a ton of CO2. The standard approach is to calculate the SCC using a discounted-utilitarian social welfare function (SWF)—one that simply adds up the well-being numbers (utilities) of individuals, as discounted by a weighting factor that decreases with time. The discounted-utilitarian SWF has been criticized both for ignoring the distribution of well-being, and for including an arbitrary preference for earlier generations. Here, we use a prioritarian SWF, with no time-discount factor, to calculate the SCC in the integrated assessment model RICE. Prioritarianism is a well-developed concept in ethics and theoretical welfare economics, but has been, thus far, little used in climate scholarship. The core idea is to give greater weight to well-being changes affecting worse off individuals. We find substantial differences between the discounted-utilitarian and non-discounted prioritarian SCC

An axiomatization of cumulative prospect theory

This paper presents a method for axiomatizing a variety of models for decision making under uncertainty, including Expected Utility and Cumulative Prospect Theory. This method identifies, for each model, the situations that permit consistent inferences about the ordering of value differences. Examples of rankdependent and sign-dependent preference patterns are used to motivate the models and the tradeoff consistency axioms that characterize them. The major properties of the value function in Cumulative Prospect Theory—diminishing sensitivity and loss aversion—are contrasted with the principle of diminishing marginal utility that is commonly assumed in Expected Utility

Deliberative and epistemic approaches to democracy

Deliberative and epistemic approaches to democracy are two important dimensions of contemporary democratic theory. This chapter studies these dimensions in the emerging ecosystem of civic and political participation tools, and appraises their collective value in a new distinct concept: linked democracy. Linked democracy is the distributed, technology-supported collective decision-making process, where data, information and knowledge are connected and shared by citizens online. Innovation and learning are two key elements of Athenian democracies which can be facilitated by the new digital technologies, and a cross-disciplinary research involving computational scientists and democratic theorists can lead to new theoretical insights of democracy