Protected Income and Inequality Aversion

Abstract

Imagine that a large increment can be given to an individual in a society. We ask: what is the maximal sacrifice that can be imposed on another individual according to an evaluator for the sake of this increment? We show that the answer can reveal how inequality averse an evaluator is. In particular, all Kolm-Pollak evaluators would sacrifice the full income of the sacrificed individual if their income was low enough and a declining fraction of their income otherwise. Kolm-Atkinson evaluators would sacrifice the full income of the sacrificed individual, for all income levels, if their inequality aversion was no greater than one, and sacrifice a constant fraction of their income otherwise. Motivated by these findings, we propose a class of social preferences that, starting from a baseline level of protection, protect a higher fraction of the sacrificed individual's income the lower their income. In addition to relating levels of protected income to coefficients of inequality, we also characterize the classes of additively separable social welfare functions that guarantee specific (absolute or relative) levels of protection.