A fair solution to the compensation problem

Abstract

We study equity in economies where agents are endowed with different, non-transferable, personal talents. To compensate them for such differences a given amount of money needs to be shared among them. We axiomatize a family of social orderings over allocations based on efficiency, fairness and robustness properties. Taking into account incentive constraints we derive the optimal policy : individuals with the same talent need to be equally compensated and only people whose level of talent is below a certain threshold should receive a positive compensation.Compensation, talents, fairness, axioms, social orderings, incentive-compatibility