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Reversal of Misfortune When Providing for Adversity

  • Author(s): McGuire, Martin
  • Becker, Gary S.
  • et al.
Abstract

Often an economic agent dissatisfied with an endowed distribution of utilities desires to optimize this distribution by transferring income or resources across individuals or states of the world. This multi-state optimization theme recurs in a wide variety of economic contexts, ranging across taxation and income distribution, international trade andmarket disruption, labor contracts and unemployment insurance, Rawlsian design of social contracts, provision for retirement, and many others.Because analyses of such topics are frequently so context driven, the generality of this theme seems to have gone unnoticed and, of a particular paradoxical result, unappreciated. Lump-sum re-distribution or perfect and fair insurance in a first best environment will reverse the preference rankings of the endowed distribution of utilities – after redistribution the originally ‘bad’ outcomes become preferred to originally better ones.

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