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The argument that the alarming level of Gini coefficient is 0.4 is verypopular, especially in the media industry, all around the world for a longtime. Although the 0.4 standard is widely accepted, the derivation of the valuelacks rigid theoretical foundations. In fact, to the best of our knowledge, itis not based on any prevalent and convincing economic theories. In this paper,we incorporate Rawls' principle of fair equality of opportunity intoArrow-Debreu's framework of general equilibrium theory with heterogeneousagents, and derive the alarming level of Gini coefficient formally. Our theoryreveals that the exponential distribution of income not only satisfies Paretooptimality, but also obeys social fairness in Rawls' sense. Therefore, wespecify the maximal value of the Gini coefficient when income followsexponential distribution as a possible alarming level. Our computations showthat the alarming level should be specified at least equal or larger than 0.5rather than 0.4. We empirically investigate if our model receives support froma large data set of all kinds of countries all over the world from Word Bank in1990, 1995, 2000 and 2005 using the distribution fitting and statisticaldecision methodology. The results suggest that the value of 0.4 is around themean of the Gini coefficients, corresponding to the most probable event in apeaceful world, rather than the alarming level, while the two-sigma rule showsthat in our sample the alarming levels are all larger than 0.5, conforming tothe predictions of our theory.

Rawls' Fairness, Income Distribution and Alarming Level of Gini Coefficient