Fair Management of Social Risk
49 Pages Posted: 8 Feb 2014
Date Written: January 31, 2014
We provide a general method for extending fair social preferences defined for riskless economic environments to the context of risk and uncertainty. We apply the method to the problems of managing unemployment allowances (in the context of macroeconomic fluctuations) and catastrophic risks (in the context of climate change). It requires paying attention to individuals' risk attitudes and rationality properties of social preferences, revisiting basic ideas from Harsanyi's seminal work (Harsanyi, 1955). The social preferences that we obtain do not in general take the form of an expected utility criterion, but they always satisfy statewise dominance. We also show how non-expected utility individual preferences can be accommodated in the approach.
Keywords: social choice, uncertainty, economic environment, social risk
JEL Classification: D63
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