Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/82542
Authors: 
Liang, Che-Yuan
Year of Publication: 
2013
Series/Report no.: 
Working Paper, Department of Economics, Uppsala University 2013:7
Abstract: 
In Rawls' (1971) influential social contract approach to distributive justice, the fair income distribution is the one that an individual would choose behind a veil of ignorance. Harsanyi (1953, 1955, 1975) treats this situation as a decision under risk and arrives at utilitarianism using expected utility theory. This paper investigates the implications of applying prospect theory instead, which better describes behavior under risk. I find that the specific type of inequality in bottom-heavy right-skewed income distributions, which includes the log-normal income distribution, could be socially desirable. The optimal inequality result contrasts the implications of other social welfare criteria.
Subjects: 
veil of ignorance
prospect theory
social welfare function
income inequality
JEL: 
D63
D03
D31
D81
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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