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Income Uncertainty and Optimal Redistribution

Southern Economic Journal (SEJ), 69(3), 2003, 718-725

Brent Kreider, Iowa State University

Implications of income uncertainty for socially efficient redistribution are examined in a utilitarian framework.
Counterintuitively, a policymaker may respond optimally to a negative utility shock in the economy by
redistributing income away from those who suffered the shock. Holding expected income constant, it may
be welfare-enhancing to redistribute income away from risk-averse taxpayers who suffer an increase in the
variance of their earnings. The direction of redistribution following an increase in uncertainty depends on the
degree to which absolute risk aversion declines with consumption. A condition is provided for when an
efficient policy redistributes away from those facing the greatest uncertainty.