The monetary utility premium and interpersonal comparisons

The utility premium is generally defined as the pain or reduction in expected utility caused by an n$n$th-degree risk increase, where n≥2$n\ge 2$. While it is a very useful concept in understanding a decision maker’s choice in uncertain situations, the utility premium is not interpersonally comparable. This note shows that the monetary utility premium–the utility premium divided by the expected marginal utility at the random starting wealth–is interpersonally comparable, and the comparison is characterized by Ross more risk aversion of the corresponding degree.     

Direct evidence on income comparisons and their welfare effects

This paper provides direct evidence that income comparisons exert a significant impact on subjective well-being. It also evaluates the relative importance of different types of benchmarks. Internal comparisons to one's own past living standard outweigh any other comparison benchmarks. Local comparisons (to one's parents, former colleagues or high school mates) are more powerful than self-ranking in the social ladder. The impact of comparisons is asymmetric: under-performing one's benchmark always has a greater welfare effect than out-performing it (in absolute value). Comparisons, which reduce satisfaction also increase the demand for income redistribution, but there, the relative impact of subjective ranking is preponderant.     

Dual labor market hypothesis and long-run income distribution

We construct a dynamic model of dual labor market, incorporating firm investment behavior and household investment behavior on education. Education enhances the trainability of individuals and thus provides qualifications for entry into the primary market. Two specifications of the model, differing in the nature of the new entrants' market, are presented; one admitting competitive adjustment in the scarcity premium of qualified entrants, while the other, a generalization of Thurow's job competition model, allocates employment through rationing. We obtain sharply different long-run determinants of income distribution between these alternative models. The result extends and qualifies existing interpretations on the schooling paradox observed in the U.S.     

Demography and welfare economics

The focusing on demographic issues as an important part of welfare-economic assessment shifts the evaluative space in the direction of public discussion and social concern. A commoditycentred view of individual success and social welfare is often used in economics. But the linkage between our economic wealth and our ability to live as we would like has strong limits. This is partly because of interpersonal variations between individuals, but also because of variations in public and social arrangements (for example, for public health care, education and social security). The use of demographic perspectives can enrich economic analysis in several ways. In particular a demographically oriented system of evaluation can not only focus on variables that we all value, but it also gives us the freedom to decide what weights would be most appropriate for the exercise in which we might be engaged. The problem of valuation in welfare economics is ultimately a social-choice issue, requiring the use of explicit judgments on which the society can achieve some consensus through political processes.Lecture presented to the annual meeting of the Austrian Economic Association in Vienna, 24 May 1994. The author is grateful for support from the National Science Foundation for the research on which this paper draws.     

Changes in income distribution and welfare from greater immigration of unskilled workers

This paper considers the consequences of greater immigration of unskilled labor on income distribution and welfare in the receiving country. To address these issues, both the sending and receiving countries are represented in a static general equilibrium model which distinguishes between skilled and unskilled labor and which allows prices to be determined endogenously. In this framework an inflow of unskilled labor is likely to reduce wages of unskilled labor, but whether capital or skilled labor benefits depends upon demand elasticities, elasticities of substitution in production, and differences across countries in the productivity of unskilled labor. National welfare in the receiving country is likely to rise, to the extent that the relative price of importable goods falls, non-residents already in the country receive lower wages, immigrants receive lower wages than those paid to domestic workers, and immigrants cause little increased demand for public services and transfer programs.     

The pareto rule and welfare economics

It is [my] contention... that the wake for all welfare economics is premature, and that welfare economics can be reconstructed with the aid of the concept of demonstrated preference. This reconstruction, however, will have no resemblance to either of the “old” or “new” edifices that preceded it. In fact...our proposed resurrection of the patient may be considered by many as more unfortunate than his demise.     

The marginal utility of income

In normative public economics it is crucial to know how fast the marginal utility of income declines as income increases. One needs this parameter for cost-benefit analysis, for optimal taxation and for the (Atkinson) measurement of inequality. We estimate this parameter using four large cross-sectional surveys of subjective happiness and two panel surveys. Altogether, the data cover over 50 countries and time periods between 1972 and 2005. In each of the six very different surveys, using a number of assumptions, we are able to estimate the elasticity of marginal utility with respect to income. We obtain very similar results from each survey. The highest (absolute) value is 1.34 and the lowest is 1.19, with a combined estimate of 1.26. The results are also very similar for subgroups in the population. Thus, on the basis of our estimates, the marginal utility of income declines somewhat faster than in proportion to the rise in income.     

The welfare economics of dominant-firm acquisitions

Conclusion The main results of this paper provide some analytic underpinning for a strict horizontal merger policy relating to dominant firms. However, even under standard assumptions, examples have been demonstrated where dominant/fringe firm mergers increase welfare. Most of these examples imply shutting down acquired facilities, a practice regarded as unfavorable evidence by the court in theStandard Oil case; consequently, they do not by themselves seem to offer much hope for raising economies as an antitrust defense. Finally, it should be noted that this paper has considered only single-product economies; economies of scope arising in multi-product (and multi-market) contexts could be large enough to justify dominant/fringe firm mergers⁹.An earlier version of this paper was presented at the Economic Policy Office seminar, Antitrust Division, U. S. Department of Justice. The author is grateful to Marius Schwartz, other seminar participants and an anonymous referee of this journal for helpful comments. M. Daniel Westbrook and Brian Flynn kindly arranged for the calculations reported in Appendix C.     

A reformulation of the foundations of welfare economics

Neoclassical welfare economics takes an outcome-oriented approach that uses Pareto optimality as its benchmark for welfare maximization. When one looks at the remarkable improvements in economic welfare that have characterized market economies, most of those improvements in welfare have been due to economic progress that has introduced new and improved goods and services into the economy, and innovations in production methods that have brought costs down, leading to higher real incomes. Pareto optimality is only peripherally related to actual economic welfare, and no economist would argue that people are materially better off today than a century ago because the economy is closer to Pareto optimality. After analyzing the actual factors that lead to improvements in welfare, this paper suggests a reformulation of the foundations of welfare economics to replace the almost irrelevant outcome-oriented concept of Pareto optimality as the benchmark for evaluating welfare with a process-oriented benchmark based on factors that generate economic progress. The paper then explores some implications of this reformulation.

The welfare economics of the socialization of commodities

Socialization is defined for the purpose of this paper as the acquisition by the goverment of the total output of a commodity such as medical services and redistribution of that commodity equally to all citizens. Simple general equilibrium models are constructed to show that when decisions are reached by majority rule a commodity is more likely to be socialized the greater the inequality of income in the community and the less diverse the tastes of individuals for that commodity. The interests of producers of commodities are also taken into account, and strategic aspects of voting about socialization are discussed.     

The basic income guarantee and social economics

This article introduces the Review of Social Economy symposium on the basic income guarantee (BIG). It argues that there are several ways in which the BIG is consistent with social economics. First, the BIG is an attempt to meet the minimum material needs of US citizens and contribute to the common good. Second, important arguments for a BIG move beyond the positive-normative dichotomy. Finally, the BIG would help individuals function as social citizens.     

Individual welfare,social deprivation and income taxation

Summary. In a homogeneous framework where individuals can only be distinguished on the basis of their incomes, we examine the incidence of taxation on the amount of deprivation felt in the society. We conceive deprivation in terms of utility or well-being rather than just in terms of income and we measure it by comparing the deprivation profiles arising in the different situations. We identify the restrictions to be imposed on the utility function which guarantee that a more progressive system of taxes always results in less social deprivation. We show that, in general, it is not possible to get an equivalence and realize a social improvement in terms of social deprivation by substituting a more progressive system of taxes for a less progressive one. Received: September 20, 1999; revised version: March 6, 2002 RID="*" ID="*" This paper forms part of the research programme of the TMR network Living Standards, Inequality and Taxation [Contract No. ERBFMRXCT 980248] of the European Communities whose financial support is gratefully acknowledged. Chakravarty wishes to express his sincere gratitude to the French Ministry of Education for financing his stay at DELTA during which this paper was written. The authors would like to thank Stephen Bazen, Nicolas Gravel and an anonymous referee, whose comments have helped to improve the paper, but they retain sole responsibility for remaining deficiencies. Correspondence to: P. Moyes     

Decentralized trade, random utility and the evolution of social welfare

We study decentralized trade processes in general exchange economies and house allocation problems with and without money. The processes are affected by persistent random shocks stemming from agents’ maximization of random utility. By imposing structure on the utility noise term—logit distribution—one is able to calculate exactly the stationary distribution of the perturbed Markov process for any level of noise. We show that the stationary distribution places the largest probability on the maximizers of weighted sums of the agents’ (intrinsic) utilities, and this probability tends to 1 as noise vanishes.     

Dynamics of income distribution

In this paper, we have obtained closed-form solutions in Cass-Koopmans growth models with heterogeneous agents. The relationship between the form of the production function and the dynamics of income distribution is made explicit. We then use this relationship to determine what production structure is simultaneously consistent with facts on growth and income inequality. Our empirical findings give support to models with decreasing returns in the reproducible factor. JEL Classification: D3, O1, O4
Dans ce mémoire, les auteurs obtiennent des solutions pour des modèles de croissance à la Cass-Koopmans dans le cas où les agents sont hétérogènes. On explicite la relation entre la forme de la fonction de production et la dynamique de la répartition des revenus. On utilise alors cette relation pour déterminer quelle structure de production est arrimée aux faits connus à la fois quant à la croissance économique et à la répartition des revenus. Les résultats empiriques supportent les modèles où les rendements sur les acteurs de production reproductibles sont décroissants.     

Normative economics and paternalism: the problem with the preference-satisfaction account of welfare

The normative turn of behavioral economics has led to a reconsideration of paternalism in normative economics. This article argues however that the preference-satisfaction account of welfare that still dominates welfare economics makes impossible to account for all the dimensions of the debate over paternalism. The laundered preferences approach and the alternative selves approach are two available frameworks to reconcile the consumer sovereignty principle that underlies the preference-satisfaction account with the fact that preferences are endogenous and context-dependent. I show however that neither of them is able to account for autonomy-related issues which are central in current debates over “soft” or “libertarian” paternalism. I suggest that a justification of paternalism compatible with liberal principles depends on the ability for reasonable persons to voluntarily consent to a collective choice rule with paternalistic tendencies. This argument relies on a distinction between preferences (which can be attached to other entities than persons) and values which is unknown to welfare economics.     

Brain drain and income distribution

In a context in which increased income inequality has raised much concern, and skilled workers move easily across countries, an important question arises: how does the brain drain affect income distribution in the source economy? We address this question and introduce two contributions to the literature on brain drain. First, we present and solve a simple stylized model to study whether and, if so, how the brain drain affects the distribution of income, in a context in which higher education is publicly financed with general taxes. Second, we explore empirically the effect of an increase in skilled emigration on income distribution. A key prediction of our theoretical model is the existence of a non-monotonic relationship between income inequality and emigration of skilled workers. Our empirical data confirm this result, showing a statistically significant inverse U-shaped form.