Inequality Aversion and the Optimal Composition of Government Expenditure

17 Pages Posted: 26 Oct 2010 Last revised: 8 Jan 2014

See all articles by John Creedy

John Creedy

University of Melbourne - Department of Economics

Shuyun May Li

University of Melbourne

Solmaz Moslehi

Monash Business School

Date Written: October 25, 2010

Abstract

This paper examines the choice between government expenditure on public goods and transfer payments, in the form of a pension, in an overlapping-generations model. Government expenditure is tax-financed on a pay-as-you-go basis. A utilitarian judge chooses expenditures to maximize a social welfare function. The nonlinear solution is found to involve the ratio of a welfare-weighted average income, which depends on the inequality aversion of the judge, to arithmetic mean income. An approximation for this ratio is found that produces explicit solutions for the optimal composition. The result is used to obtain an indication of “implicit” inequality aversion for a range of countries.

Keywords: Inequality aversion, Composition of Government Expenditure, Overlapping Generations

JEL Classification: D72, H41, H53, H11

Suggested Citation

Creedy, John and Li, Shuyun May and Moslehi, Solmaz, Inequality Aversion and the Optimal Composition of Government Expenditure (October 25, 2010). Macroeconomic Dynamics, 14 (S2), 2010, pp. 290-306., Available at SSRN: https://ssrn.com/abstract=1697877

John Creedy

University of Melbourne - Department of Economics ( email )

Level 5, FBE Building, 111 Barry Street
Parkville, Victoria 3010
Australia
+61 800 666 300 (Phone)
+61 3 9347 3986 (Fax)

Shuyun May Li (Contact Author)

University of Melbourne ( email )

Melbourne, 3010
Australia

Solmaz Moslehi

Monash Business School ( email )

Wellington Road
Clayton, Victoria 3168
Australia

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