The Rotten Kid Theorem and Almost Transferable Utility

13 Pages Posted: 19 Jan 2016

See all articles by Elisabeth Gugl

Elisabeth Gugl

University of Victoria - Economics

Justin Leroux

HEC Montreal - Institute of Applied Economics; CIRANO

Date Written: December 08, 2015

Abstract

We assume like Bergstrom (1989) and Dijkstra (2007) that each child's utility is treated as a normal good in the altruistic head's utility function, and show that if utility functions lead to Almost Transferable Utility children can manipulate the tradeoff between their own utility and the parent's utility through their own actions, but they have an incentive to maximize the altruistic head's utility if the altruistic head also considers children's utilities as Hicksian substitutes and hence the rotten kid theorem holds. A special class of such altruistic utility functions that treat utilities of children as normal and Hicksian substitutes are the Generalized Utilitarian Welfare functions.

Keywords: Rotten Kid Theorem, transferable utility, Hicksian substitutes, fiscal federalism

JEL Classification: H700

Suggested Citation

Gugl, Elisabeth and Leroux, Justin, The Rotten Kid Theorem and Almost Transferable Utility (December 08, 2015). CESifo Working Paper Series No. 5642, Available at SSRN: https://ssrn.com/abstract=2717422 or http://dx.doi.org/10.2139/ssrn.2717422

Elisabeth Gugl (Contact Author)

University of Victoria - Economics ( email )

Victoria V8W Y2Y, BC
Canada

Justin Leroux

HEC Montreal - Institute of Applied Economics ( email )

3000, ch. de la Côte-Ste-Catherine
Montréal, Quebec H3T 2A7
Canada

CIRANO ( email )

2020 rue University, 25th floor
Montreal H3C 3J7, Quebec
Canada

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