Hostname: page-component-8448b6f56d-qsmjn Total loading time: 0 Render date: 2024-04-23T14:20:39.352Z Has data issue: false hasContentIssue false
  • English
  • Français

INEQUALITY AVERSION AND THE OPTIMAL COMPOSITION OF GOVERNMENT EXPENDITURE

Published online by Cambridge University Press:  26 October 2010

John Creedy ,
Shuyun May Li  and
Solmaz Moslehi
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.
Get access Rights & Permissions [Opens in a new window]

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.

Keywords

Overlapping GenerationsComposition of Government ExpenditureUtilitarian Social Welfare Function
Type
Articles
Information
Macroeconomic Dynamics , Volume 14 , Supplement S2: Public Policy, Externalities, and Economic Growth , November 2010 , pp. 290 - 306
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.Google 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, 213–230.Google 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. 163–198. 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, 217–245.Google Scholar
Corneo, G. and Grüner, H.P. (2002) Individual preferences for political redistribution. Journal of Public Economics 83, 83–107.CrossRefGoogle Scholar
Cragg, M. (1991) Do we care? A study of Canada's indirect tax system. Canadian Journal of Economics 24, 124–143.CrossRefGoogle Scholar
Creedy, J. and Moslehi, S. (2009) Modelling the composition of government expenditure in democracies. European Journal of Political Economy 25, 42–55.CrossRefGoogle Scholar
Ghiglino, C. (2000) Optimal policy in OG models. Journal of Economic Theory 90, 62–83.Google Scholar
Lambert, P., Millimet, D.L., and Slottje, D. (2003) Inequality aversion and the natural rate of subjective inequality. Journal of Public Economics 87, 1061–1090.Google Scholar
Madden, D. (1992) Can we infer external effects from a study of the Irish indirect tax system? Economic and Social Review 24, 63–74.Google Scholar
Madden, D. (1995) An analysis of indirect tax reform in Ireland in the 1980s. Fiscal Studies 16, 18–37.CrossRefGoogle Scholar
Meltzer, A.H. and Richard, S.F. (1981) A rational theory of the size of government. Journal of Political Economy 89, 914–927.Google Scholar
Mera, K. (1969) Experimental determination of relative marginal utilities. Quarterly Journal of Economics 83, 464–477.Google Scholar
Moreh, J. (1981) Income inequality and the social welfare function. Journal of Economic Studies 8, 25–37.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, 551–556.Google Scholar
Ravallion, M. (1988) INPRES and inequality: A distributional perspective on the Centre's Regional Disbursements. Bulletin of Indonesian Economic Studies 24, 53–71.Google 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, 233–239.Google Scholar
Spadaro, A. (2007) Implicit social preferences and fiscal reforms: A microsimulation analysis for Spain. Research in Labour Economics 25, 199–212.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. 209–257. Oxford, UK: Basil Blackwell.Google Scholar
Van de Ven, J. and Creedy, J. (2005) Taxation, reranking and equivalence scales. Bulletin of Economic Research 57, 13–36.CrossRefGoogle Scholar