Dynamic Welfare Analysis of Income Distributions: the Trade-off Between Equity and Long-Run Efficiency
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Abstract
I exploit the theory of stochastic orders to formalize preferences over sequences of income distributions that embody suitable principles of equity and efficiency. Intragenerational and intergenerational equity are combined into a new concept of equity that extends the Hammond’s equity principle (for infinite utility streams) to the realm of stochastic processes. The main result of the paper can be interpreted as follows: short-sighted, piecemeal economic policies that enhance equity may come at the expense of the income of generations in the far-off future. The proof of the instrumental lemma could be of interest in its own right because it uncovers the interplay between moment-generating functions and stochastic orders.
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Keywords
Welfare analysis, Income distribution, Equity-efficiency trade-off, Stochastic orders, Intergenerational equity
Citation
Ruscitti, Francesco. n.d. “Dynamic Welfare Analysis of Income Distributions: The Trade-off Between Equity and Long-Run Efficiency.” Communications in Optimization Theory.