Optimal Income Distribution Research Articles

Rethinking Income Inequality: A Search for the Optimal Distribution

The United Nations’ ambitious 2030 Agenda, adopted in September 2015, outlines 17 Sustainable Development Goals (SDGs) with the overarching aim of eradicating poverty and hunger. This agenda represents an unprecedented opportunity to address global challenges. However, one crucial aspect, achieving an appropriate level of income disparity (income inequality), remains a significant hurdle for both academics and policymakers. This research gap necessitates a deeper exploration of the theoretical underpinnings of an optimal income distribution for a given population size. This study delves into this under-researched area by analysing the World Bank’s data on population size and the Gini coefficient (a metric for income inequality) for 103 countries (most recent year data available, up to 2023). The analysis employs regression techniques to unveil the relationship between the Gini coefficient and the natural logarithm of population size. The findings suggest a non-linear association, best characterized by a second-degree polynomial function. This implies that the relationship between population size and optimal income distribution is not a simple linear one. Furthermore, the estimated results indicate that the majority of countries in the sample exhibit Gini coefficients that deviate significantly from their theoretically optimal levels. This finding presents valuable insights for policymakers as they design and implement public policies aimed at achieving a more equitable income distribution. The subsequent section delves into a detailed case study of India, analysing its Gini coefficient and the extent of its deviation from the estimated optimal level.

Inequality in the Distribution of Wealth and Income as a Natural Consequence of the Equal Opportunity of All Members in the Economic System Represented by a Scale-Free Network

The purpose of this work is to examine the nature of the historically observed and empirically described by the Pareto law inequality in the distribution of wealth and income in an economic system. This inequality is presumed to be the result of unequal opportunity by its members. An analytical model of the economic system consisting of a large number of actors, all having equal access to its total wealth (or income) has been developed that is formally represented by a scale-free network comprised of nodes (actors) and links (states of wealth or income). The dynamic evolution of the complex network can be mapped in turn, as is known, into a system of quantum particles (links) distributed among various energy levels (nodes) in thermodynamic equilibrium. The distribution of quantum particles (photons) at different energy levels in the physical system is then derived based on statistical thermodynamics with the attainment of maximal entropy for the system to be in a dynamic equilibrium. The resulting Planck-type distribution of the physical system mapped into a scale-free network leads naturally into the Pareto law distribution of the economic system. The conclusions of the scale-free complex network model leading to the analytical derivation of the empirical Pareto law are multifold. First, any complex economic system behaves akin to a scale-free complex network. Second, equal access or opportunity leads to unequal outcomes. Third, the optimal value for the Pareto index is obtained that ensures the optimal, albeit unequal, outcome of wealth and income distribution. Fourth, the optimal value for the Gini coefficient can then be calculated and be compared to the empirical values of that coefficient for wealth and income to ascertain how close an economic system is to its optimal distribution of income and wealth among its members. Fifth, in an economic system with equal opportunity for all its members there should be no difference between the resulting income and wealth distributions. Examination of the wealth and income distributions described by the Gini coefficient of national economies suggests that income and particularly wealth are far off from their optimal value. We conclude that the equality of opportunity should be the fundamental guiding principle of any economic system for the optimal distribution of wealth and income. The practical application of this conclusion is that societies ought to shift focus from policies such as taxation and payment transfers purporting to produce equal outcomes for all, a goal which is unattainable and wasteful, to policies advancing among others education, health care, and affordable housing for all as well as the re-evaluation of rules and institutions such that all members in the economic system have equal opportunity for the optimal utilization of resources and the distribution of wealth and income. Future research efforts should develop the scale-free complex network model of the economy as a complement to the current standard models.

The economics of the COVID-19 pandemic: economic evaluation of government mitigation and suppression policies, health system innovations, and models of care.

The COVID-19 pandemic has impacted the scope of health economics literature, which will increasingly examine value beyond health care interventions such as government policy and broad health system innovations. The study analyzes economic evaluations and methodologies evaluating government policies suppressing or mitigating transmission and reducing COVID-19, broad health system innovations, and models of care. This can facilitate future economic evaluations and assist government and public health policy decisions during pandemics. The Preferred Reporting Items for Systematic reviews and Meta-Analyses extension for Scoping Reviews (PRISMA-ScR) was used. Methodological quality was quantified using the scoring criteria in European Journal of Health Economics, Consolidated Health Economic Evaluation Reporting Standards (CHEERS) 2022 Checklist and the National Institute for Health and Care Excellence's (NICE) Cost Benefit Analysis Checklist. PUBMED, Medline, and Google Scholar were searched from 2020-2021. Cost utility analysis (CUA) and cost benefit analysis (CBA) analyzing mortality, morbidity, quality adjusted life year (QALY) gained, national income loss, and value of production effectively evaluate government policies suppressing or mitigating COVID-19 transmission, disease, and impacting national income loss. The WHO's pandemic economic framework facilitates economic evaluations of social and movement restrictions. Social return on investment (SROI) links benefits to health and broader social improvements. Multi-criteria decision analysis (MCDA) can facilitate vaccine prioritization, equitable health access, and technology evaluation. Social welfare function (SWF) can account for social inequalities and population-wide policy impact. It is a generalization of CBA, and operationally, it is equal to an equity-weighted CBA. It can provide governments with a guideline for achieving the optimal distribution of income, which is vital during pandemics. Economic evaluations of broad health system innovations and care models addressing COVID-19 effectively use cost effectiveness analysis (CEA) that utilize decision trees and Monte Carlo models, and CUAs that effectively utilize decision trees and Markov models, respectively. These methodologies are very instructive for governments, in addition to their current use of CBA and the value of a statistical life analytical tool. CUA and CBA effectively evaluate government policies suppressing or mitigating COVID-19 transmission, disease, and impacts on national income loss. CEA and CUA effectively evaluate broad health system innovations and care models addressing COVID-19. The WHO's framework, SROI, MCDA, and SWF can also facilitate government decision-making during pandemics. The online version contains supplementary material available at 10.1007/s10389-023-01919-z.

Measurement of inequality of opportunity: A normative approach

We develop a normative approach to the measurement of inequality of opportunity. That is, we measure inequality of opportunity by the welfare gain obtained in moving from the actual income distribution to the optimal income distribution of the total available income. Our study brings together the main approaches in the literature: we axiomatically characterize social welfare functions, we obtain prominent allocation rules as their optima, and we derive familiar classes of inequality of opportunity measures. Our analysis captures moreover the key philosophical distinctions in the literature: ex post versus ex ante compensation, and liberal versus utilitarian reward.

Getting to a feasible income equality.

Income inequality is known to have negative impacts on an economic system, thus has been debated for a hundred years past or more. Numerous ideas have been proposed to quantify income inequality, and the Gini coefficient is a prevalent index. However, the concept of perfect equality in the Gini coefficient is rather idealistic and cannot provide realistic guidance on whether government interventions are needed to adjust income inequality. In this paper, we first propose the concept of a more realistic and 'feasible' income equality that maximizes total social welfare. Then we show that an optimal income distribution representing the feasible equality could be modeled using the sigmoid welfare function and the Boltzmann income distribution. Finally, we carry out an empirical analysis of four countries and demonstrate how optimal income distributions could be evaluated. Our results show that the feasible income equality could be used as a practical guideline for government policies and interventions.

The principal-agent model in venture investment based on fairness preference

<abstract> <p>The fairness preference in the principal-agent relationship is a vital factor that can even determine the success or failure of one program. Under normal circumstances, the capital invested by VC is often several times that of EN, which is one of the reasons for the profit gap between EN and VC. Therefore, when establishing a principal-agent model with fairness preferences, it is necessary to project the utility of VC to the level of EN and compare it with the utility of venture entrepreneurs, which will better reflect the profit gap between the two. On the basis of previous studies, this paper considers the amount of contribution of the participants, builds four principal-agent models to find the optimal distribution of income between the Venture Entrepreneur (EN) and the Venture Capital (VC) in a venture capital investment program, two without fairness preference and others with fairness preference. After the simulation we confirm that the fairness preference coefficient exerts a great impact on the distribution of income in both situations where information is symmetric and asymmetric, and a strong fairness preference will lead to a greater net profit gap between the EN and the VC. Thus, the EN should carefully choose the level of his efforts to realize the maximum return for him. In the case of information asymmetry, EN's optimal effort level decreases as the fairness preference coefficient increases.This will affect project revenue. And then affect the VC income.</p> </abstract>

Measuring economic order in the knowledge economy: A cross-country analysis

The advent of the knowledge economy has transformed the behavior of economic agents and the nature of transactions. In particular, the increase of knowledge based transactions not associated with monetary flows is weakening the significance of traditional measures of economic dynamics like gross domestic product (GDP) or national income (NI). The objective of the working paper is to improve the measurement of new economic dynamics introducing a model that measures and explains Economic Order in the knowledge economy driven by the agents of Governance , Wealth , Conflict and Mutuality . Income, a component of the Wealth agent, is an independent variable of the model. Its maximization is not an objective within the analyzed economic framework. Therefore, income and production growth are not primary goals, but instead they make a complementary contribution to Order . Besides, Welfare is not built exclusively on the optimal distribution of income, and sourced on individual utility and preferences, but on the economic order of the system. The Transaction is the vehicle that constitutes the minimal unit facilitating or preventing exchange within and among the economic agents. An empirical analysis is performed over a cross-sectional sample of quantitative and qualitative data of 142 countries of the world economy in the period 2010-2011. A Logit regression is constructed where the dependent variable explaining Order is an index denominated Disentropy . Lower income inequality (Gini) does not mean a higher level of Order. As an economy achieves more economic order Wealth becomes a less relevant agent. Human development (HDI) is positively correlated with economic order. The Disentropy linear function is normalized to obtain a Cobb-Douglas analogous function. This function is twice differentiable and its hessian is lower than zero evidencing a concave behavior of the Disentropy variable. Hence Order presents decreasing outputs to scale across the considered sample of countries. A ranking of world top ordered economies is listed probably having the following common features among them: knowledge intensive, international focus, small population, homogeneous culture, self-identity, solid institutions and mainly democratic. Normal 0 21 false false false ES X-NONE X-NONE /* Style Definitions */ table.MsoNormalTable {mso-style-name:Tabla normal; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-priority:99; mso-style-qformat:yes; mso-style-parent:; mso-padding-alt:0cm 5.4pt 0cm 5.4pt; mso-para-margin:0cm; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:11.0pt; font-family:Calibri,sans-serif; mso-ascii-font-family:Calibri; mso-ascii-theme-font:minor-latin; mso-fareast-font-family:Times New Roman; mso-fareast-theme-font:minor-fareast; mso-hansi-font-family:Calibri; mso-hansi-theme-font:minor-latin; mso-bidi-font-family:Times New Roman; mso-bidi-theme-font:minor-bidi;}

An interpretation of the Gini coefficient in a Stiglitz two-type optimal tax problem

In a two-type Stiglitz, J. Public Econ. 17, 213–240 (1982) model of optimal non-linear taxation it is shown that when the utility function relating to consumption is logaritmic the shadow price of the incentive constraint relating to the optimal tax problem exactly equals the Gini coefficient of the second-best optimal income distribution of a utilitarian government. In this sense the optimal degree of income redistribution is determined by the severity of the incentive problem facing the policy-maker. Extensions of the benchmark model to allow for more general functional forms of the utility function and for more than two types of workers reveal that also in these cases the desired degree of income redistribution is positively correlated with the shadow prices of the incentive constraints.

Research on coordination mechanism in three-level green supply chain under non-cooperative game

In view of the three-level green supply chain system in which market demand correlates with product green degree, game theory is applied to study four models, namely cooperative decision-making, three-level leader–follower game, Stackelberg game I and Stackelberg game II. Theoretical analysis shows that the profits of both the supply chain system and participating members reach the optimal level under cooperative decision-making, while the decision results of participating members as well as the channel profit are far from satisfactory under the non-cooperative game. By building a revenue sharing mechanism, Shapley value method coordination mechanism and asymmetric Nash negotiation mechanism, supply chain members are motivated to respond positively to the cooperation in producing and marketing green products, the optimal income distribution coefficient of participating members is given, and the income of each member is increased substantially as is compared with that under the non-cooperative game. Also, by determining the cooperative parameter, green supply chain managers may effectively get involved in the aforementioned coordination mechanisms to intervene and regulate the green channel so as to promote the smooth operation of green supply chain.

A concern about low relative income, and the alignment of utilitarianism with egalitarianism

A utilitarian social planner who maximizes social welfare assigns the available income to those who are most efficient in converting income into utility. However, when individuals are concerned about their income falling behind the incomes of others, the optimal income distribution under utilitarianism is equality of incomes.

Efficient Social Welfare Function and Optimal Income Distribution

By showing that increases in the sum of aggregate income and aggregate Marshallian consumer surplus represent potential Pareto improvement, this paper builds a theoretical ground for using aggregate Marshallian consumer surplus as a social welfare indicator. The optimal income distribution that potentially Pareto dominates any other income distribution is studied. It is shown that the income distribution is optimal if and only if the marginal aggregate Marshallian consumer surplus of income is equalized across all consumers. An index that measures income distribution non-optimality rather than inequality is then developed. It is found that the social cost of income distribution non-optimality in a perfect competitive market could be surprisingly high. Finally, a new approach of social welfare function is developed and it is shown that a social welfare function can be expressed by the sum of aggregate income and aggregate Marshallian consumer surplus if and only if the marginal social welfare of a good is equal to its market price.

Federalismo fiscal y asignación de competencias: una perspectiva teórica

Este ensayo tiene como finalidad hacer un recuento de los principios básicos del federalismo fiscal desde la perspectiva de uno de sus autores clásicos: Wallace E. Oates, quien retoma las funciones primarias del sector público (la estabilización, la distribución y la asignación) desarrolladas por Richard Musgrave. Con tal propósito, se abordan las ventajas y desventajas de un gobierno descentralizado, los principios conceptuales que pudieran guiar una distribución óptima de competencias en materia de ingreso y gasto de los diversos ámbitos de gobierno que conforman la federación. Asimismo, se destaca el rol de las transferencias condicionadas y no condicionadas con fines redistributivos y de compensación de los desequilibrios regionales que surgen en los sistemas federales. Finalmente, se hace una lectura del centralismo fiscal mexicano y de sus incipientes experiencias de descentralización que en estricto sentido no han trascendido la desconcentración.

Asymmetric Information and Public Economics: The Mirrlees-Vickrey Nobel Prize

This paper surveys the contributions of Nobel laureates James Mirrlees and William Vickrey to the study of asymmetric information in economics, particularly as they relate to problems in public economics. It discusses and interprets Mirrlees's work on optimal income taxation and relates it to previous work on optimal distribution of income, including that of Vickrey. It also describes Vickrey's fundamental contribution to auction theory and its importance for the more general field of preference revelation. It also includes an evaluation of the prize winners' work in other areas of public economics, particularly on optimal indirect taxation and marginal cost pricing.

Optimal Income Distribution Rules and Representative Consumers

This paper derives observable properties of economies with optimal income distribution rules that specify consumers' incomes as functions of aggregate income and prices. Optimality implies that the aggregate demand function is generated by a single “representative” consumer, cf. Samuelson (1956). We derive an additional implication which, when consumers receive fixed shares of aggregate income, requires that the consumers' demands become more dispersed when aggregate income rises. This last condition has empirical support. The results relate the representative consumer's preferences to a version of Kaldor's compensation criterion and show when both can be used for normative analysis without internal inconsistency.

Interdependent welfare functions and optimal income distribution

The relationship between income distribution and social welfare is empirically analyzed, while explicitly allowing for the interdependence of individual welfare functions. The social welfare function is taken to be an additive function of individual welfare functions of income (WFIs). On the basis of Dutch data it is found that under certain conditions (such as absence of effects of income redistribution on productivity) an equal distribution of incomes is suboptimal. The interdependence of WFIs appears to have a pronounced effect on policy conclusions concerning the desirability of income redistribution vis-à-vis economic growth.

The welfare implications of spatial interdependence: An extension of Wheaton's “optimal distribution of income among cities”

The welfare implications of spatial interdependence: An extension of Wheaton's “optimal distribution of income among cities”

On the optimal distribution of income and educational expenditure

This paper extends the work of Arrow and Bruno on the optimal distribution of educational expenditure. It examines educational policies when both education and income redistribution policies are simultaneously optimised. The analysis is undertaken for both fixed and variable labour supply. It is shown that these modifications lead to more regressive educational policies than suggested by Arrow and Bruno.

Dual interpersonal comparisons of utility and the welfare economics of income distribution

Interpersonal comparisons can be of utility levels and/or of utility differences. Comparisons of levels can be used to define equity in distributing income. Comparisons of differences can be used to construct an additive Bergson social welfare function over income distributions. When both utility levels and utility differences are compared, one can require the constructed additive Bergson social welfare function to indicate a preference for more equitable income distributions. This restricts the form of both the individual utility functions and the optimal distribution of income. The form of these restrictions depends on whether the levels and differences of the same utility functions are being compared.

On the optimal distribution of income among cities

In a competitive land market, different consumers will bid differing amounts to be located at one or another points in space. This article demonstrates that consumers fare better by competing in land markets where other competitors have different bid structures than they. Since income has a strong effect on one's bidding, the paper formally proves that poor consumers would, ceteris paribus, prefer to locate in cities with rich consumers and vice versa. With respect to the market for urban land, the inference is that cities heterogeneous in income are preferred by all to homogeneous ones.

The Impact of Income Maintenance Programs on Investment and Growth

Resources of the nation can be used to purchase either more total income or a more equal income distribution. Both equity (more equal income) and efficiency (more total income) are of value to society, but sacrifice of one may be required to gain more of the other. Society can make a betterjudgment of what is an optimal distribution of income if it is aware of the trade-offs between equity and efficiency. This paper reports the impact of a broad range of income transfer programs (which ostensibly promote income equality) on investment and income, using 1960-69 as a study period.1 The study rests on the proposition that long-run real income growth is a function of investment and aggregate supply in the Harrod-Domar tradition rather than by aggregate demand in the Keynesian tradition. Support for this proposition rests on apparently limitless wants of consumers in the long run and the widespread interpretation of the Keynesian model as relevant only to a short-run situation of excess production capacity (supply) and desire for liquidity as reflected in high ex ante savings intentions. Nevertheless, because lack of aggregate demand as well as aggregate investment and supply can limit short-run income growth, and because gross private domestic investment data used herein include some consumer durable investments which generate no future income streams, our estimates suggest the upper limit of the influence of income redistribution on income growth through investment. Steps involved in the analysis are: (a) to determine the distribution of benefits among income classes by sectors; (b) to determine the distribution of costs among income classes by sectors; and (c) to specify an investment function and combine the distributions obtained in steps (a) and (b) to determine the effects of income transfers on investment spending and income growth. A simulation model was constructed to process the data and derive summary measures reflecting the effects of public transfer program expenditures. Input into the model included distributions among income classes of population, investment, consumption, and benefits and costs of public transfer expenditures. Output from the model included net transfer effects of program expenditures, investment effects, income growth, and summary measures of distributional inequalities. The population, divided into urban, rural nonfarm, and farm sectors, was further divided into ten income classes (after taxes). Dollar amounts unless indicated otherwise (including income classifications) are reported in constant 1961 dollars below. Three base years provided data to allocate benefits from welfare programs and taxes necessary to pay for such programs. Data for base year 1961 were derived from the Survey of Consumer Expenditures (U.S. Dep. of Labor). Data for base years 1965 and 1966 were derived from the Survey of Economic Opportunity (U.S. Dep. of Commerce 1966-67). Distributions for the remaining years were linearly interpolated from base year data for the 1960-69 study period. The distribution of income was determined from Statistical Abstract of the United States (U.S. Dep. of Commerce 1961-70). Table 1 shows expenditures under welfare programs considered in the study.2 Initially, income distributions by class and by sector were determined by the model. The first, posttransfer income, was the actual distribution of income including benefits from welfare programs and the corresponding Neil Walker is a research fellow at the University of New England, Armidale, Australia, and Luther G. Tweeten is Regents Professor at Oklahoma State University. Journal article 3056 of the Agricultural Experiment Station, Oklahoma State University. Most of the research reported in this paper was conducted at Oklahoma State University. I Income redistribution also effects work incentives. Labor effects have received considerably more research attention than have investment effects and are considered by Bawden in this session. This paper disregards labor effects and concentrates on the impact of income transfers on income through intervening investment variables. 2 Not included in the social insurance programs of this paper are farm commodity programs, which may be justified to hold a strategic reserve and stabilize prices but not to provide income transfers to the poor.