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Leaky Buckets Versus Compensating Justice: An Experimental Investigation

Author

Listed:
  • Eva Camacho-Cuena

    (Autonomous University of Madrid, Spain)

  • Tibor Neugebauer

    (University of Hanover, Germany)

  • Christian Seidl

    (University of Kiel, Germany)

Abstract
Leaky-bucket transactions can be regarded as income transfers allowing for transaction costs. In its most rudimentary form, leaky-bucket transactions trace out the maximum “leakage” of transaction costs before income inequality is exacerbated, or—alternatively—before a welfare loss is experienced. This notion suggests that part of the income transfer should reach the transferee in order to keep the degree of income inequality or social welfare intact. However, in general, this conjecture is theoretically wrong. Rather there exists a unique benchmark such that it holds only for transfers among income recipients below the benchmark. When both are above the benchmark, the transferee has to be given more than the amount taken from the transferor, and when they are on opposite sides of the benchmark, both should experience an income loss. These three cases cover progressive transfers only. Three more cases apply to regressive transfers, and six more cases apply to income gains. Each of these twelve cases is covered by the present paper. Yet experimental research shows poor empirical evidence for this theory. Subjects’ perceptions of maintaining the degree of income inequality rather follow a simple precept: If someone gains income, the other person involved should be positively compensated, and if someone loses income, the other person involved should be negatively compensated. This expresses sort of compensating justice rather than restoration of the former degree of income inequality according to the orthodox theory. Compensating justice is, however, at variance with the transfer principle.

Suggested Citation

  • Eva Camacho-Cuena & Tibor Neugebauer & Christian Seidl, 2007. "Leaky Buckets Versus Compensating Justice: An Experimental Investigation," Working Papers 74, ECINEQ, Society for the Study of Economic Inequality.
    • Handle: RePEc:inq:inqwps:ecineq2007-74
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    File URL: http://www.ecineq.org/milano/WP/ECINEQ2007-74.pdf
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    References listed on IDEAS

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    Cited by:

    1. Casilda Lasso de la Vega & Christian Seidl, 2007. "The Impossibility of a Just Pigouvian," Working Papers 69, ECINEQ, Society for the Study of Economic Inequality.
    2. Traub, Stefan & Seidl, Christian & Schmidt, Ulrich, 2009. "An experimental study on individual choice, social welfare, and social preferences," European Economic Review, Elsevier, vol. 53(4), pages 385-400, May.

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    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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