Redistribution and Inequality in a Heterogeneous Society

In: Economica, Band 76, Heft 304, S. 704-718

Abstract

This paper analyses how income redistribution affects inequality in a society in which individuals differ in their earning abilities and their preferences for consumption and leisure. After discussing the shortcomings of various standard approaches, I measure inequality in such a heterogeneous society by the inequality in individuals' so‐called equivalent wages. This approach suggests that redistribution tends to reduce inequality by transferring income from high‐ability to low‐ability individuals, but to increase inequality by transferring income from consumption‐loving to leisure‐loving individuals. These countervailing effects lead in all my simulations to a U‐shaped relationship between redistribution and inequality.