Inequality aversion, income redistribution and economic geography

Y. Schaeffer and Sylvie Charlot

Working Papers from Grenoble Applied Economics Laboratory (GAEL)

Abstract: Standard 'New Economic Geography' (NEG) models assume mobile individuals settle in the region where they can earn the highest real income. But recent economic studies on 'Happiness' have accumulated empirical evidence suggesting most individuals - not just the poor - dislike living in regions where income inequality is high. Using a Krugman-type model,augmented with housing costs, we introduce the notion of 'Local Inequality Aversion' and show how it matters to economic geography. On the one hand, mobile individuals suffer an endogenous regional disamenity - income inequality - which produces an agglomerative (dispersive) force when transport costs are high (low). On the other hand, local inequality aversion is likely to lead to some redistributive transfers which benefit both rich and poor : if so, an increase in aversion intensity favors increased agglomeration.

Keywords: INEQUALITY AVERSION; INCOME REDISTRIBUTION; ENDOGENOUS AMENITY; CONGESTION COSTS; NEW ECONOMIC GEOGRAPHY; HAPPINESS (search for similar items in EconPapers)
JEL-codes: H71 R12 R28 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-geo, nep-pbe and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:gbl:wpaper:201204

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