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Inequality-Minimization with a Given Public Budget

Diskussionspapiere extern

Johannes König, Carsten Schröder

Berlin: Freie Univ. Berlin, FB Wirtschaftswiss., 2016, 18 S.
(Discussion Paper / School of Business & Economics ; 2016,16)


We solve the problem of a social planner who seeks to minimize inequality via transfers with a fixed public budget in a distribution of exogenously given incomes. The appropriate solution method depends on the objective function: If it is convex, as in the case of the absolute mean deviation, it can be solved by an interior-point algorithm. If it is quasiconvex, as in case of the Gini coefficient, the bisection method can be used. We implement the procedures using artificial and real-world data, and show that the optimal transfer scheme need not comply with a transfer scheme that perfectly equalizes incomes at the bottom of the distribution.

Johannes König

Research Associate in the German Socio-Economic Panel study Department

Carsten Schröder

Board of Directors SOEP and Division Head Applied Panel Analysis in the German Socio-Economic Panel study Department

JEL-Classification: C61;D63;H23;H53;I38
Keywords: redistribution, public transfers, inequality, optimization methods, interior-point algorithm, bisection method
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