Efficiency Based Measures of Inequality

21 Pages Posted: 26 Jun 2014 Last revised: 8 Nov 2014

Date Written: November 5, 2014


How should we make value judgments about wealth inequality? Harsanyi (1953) proposes to take an individual who evaluates her well-being by expected utility and ask her to evaluate the wealth possibilities ex-ante (i.e. before she finds her place in society, i.e., under the "veil of ignorance" of Rawls (1971)) assuming that she will be allocated any one of the possible wealth levels with equal probability. We propose a different notion of how wealth levels are allocated, based on a competition or contest. We find that inequality can be captured through the equilibrium properties of such a game. We connect the inequality measures so derived to existing measures of inequality, and demonstrate the conditions under which they satisfy the received key axioms of inequality measures (anonymity, homogeneity and the Pigou-Dalton transfer principle). Our approach also provides a natural way to discuss the tradeoff between greater total wealth and greater inequality.

Keywords: utilitarianism, inequality, contests

JEL Classification: C72, C73, D63, D72

Suggested Citation

Andonie, Costel and Kuzmics, Christoph and Rogers, Brian W., Efficiency Based Measures of Inequality (November 5, 2014). Institute of Mathematical Economics Working Paper No. 512, Available at SSRN: https://ssrn.com/abstract=2458917 or http://dx.doi.org/10.2139/ssrn.2458917

Costel Andonie

City University of Hong Kong (CityU) ( email )

Department of Marketing
Kowloon Tong
Hong Kong

Christoph Kuzmics (Contact Author)

University of Graz - Department of Economics ( email )

Universitaetsstrasse 15
Graz, 8010

Brian W. Rogers

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

HOME PAGE: http://www20.kellogg.northwestern.edu/facdir/facpage.asp?sid=10018

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