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Income Uncertainty and Optimal Redistribution
Author(s) -
Kreider Brent
Publication year - 2003
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.1002/j.2325-8012.2003.tb00523.x
Subject(s) - redistribution (election) , economics , earnings , shock (circulatory) , consumption (sociology) , welfare , variance (accounting) , redistribution of income and wealth , econometrics , microeconomics , public good , medicine , market economy , social science , accounting , sociology , politics , political science , law
Implications of income uncertainty for socially efficient redistribution are examined. Counter‐intuitively, a policymaker may respond optimally to a negative utility shock in the economy by redistributing income away from those who suffered the shock. In particular, it may be welfare enhancing to redistribute income away from risk‐averse taxpayers who suffer an increase in the variance of their earnings. The direction of redistribution following an increase in uncertainty depends on the degree to which absolute risk aversion declines with consumption. A condition is provided for when an efficient policy redistributes away from those facing the greatest uncertainty.