06.12.2023 Inequality#

Income Distribution#

Income: Amount of Money available for consumption at beginning of period

Measurement = Lorenz Curve

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From Here: Calculation of the Gini Coefficient

Empirical#

  1. market income = primary income distribution

  2. disposable Income = secondary Income distribution

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Additional Measures

  • 80:20 Quintile Ratio (OECD & Eurostat)

  • World Inequality Report: riches 10% vs 50%

  • shared prosperity (World Bank): Income Growth of poorest 40%

10:50 Measurement (from World Inequality Report)

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Development of Income Inequality#

  • Globally = sunken

  • Reduction of Poverty in East-Asia

  • 1% has Grown a lot

  • Industrialized Countries = inequality grown

Reasons for higher Ineq.:

  • Reduction Wage Rate

  • Reduction union bargaining power

  • technological change

  • market power

  • lower tax rate for high-income earners

Wealth#

net Wealth: present value individual including \(Demands - Debt\)

  • difficult to measure

  • germany lower than other countries

    • caluclation of pension savings = difficult

  • also human capital?

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Equity and Efficiency#

Tradeoff?

  • Pareto Criterion: make one person better off without making someone esle less

  • pareto efficiency

Utility Possibility Curve#

Set of Options that are pareto-efficient

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Sets of Options of HH1, HH2 that are pareto efficient (except for C)

if at A = tyranny of the status quo

Measuring Inequality

  • ordinal: „a better than b“

  • Cardinal: „+100 for a is double better than +100 for b“

Trade Off of Redistribution

  • change individual behavior

  • effiency loss (work less)

also: positive effects of redistribution

Social Welfare Function#

Aggregation of individual utilities in Society

\[ SWF: W=W(U_1,U_2,...,U_n) \]

Requirements to an SWF

  • individualistic (based on indiviudals utilities )

  • pareto criterion (pareto-superior allocations = higher W)

  • inequality aversion (lower inequality = higher W)

Examples of SWF:

  • Utilitarian: \(W = \sum U_n(x_n)\)

    • decreasing marginal utility => inequality aversion

  • Rawlsian: \(W = \min [U_n(x_n)]\)

    • if nobody knows what position they will take in society

    • they will maximize welfare for lowest person in society

=> no right SWF! (or SWF itself are bullshit…)