Relative Concerns and Social Exclusion: Economic Policy and Human Capital in an Interdependent World

Modern theory of optimal redistributive taxation and public expenditures largely neglects empirics showing that people’s utility does not only depend on their own consumption (broadly defined) but also on their relative consumption compared to referent others. Experimental research also indicates that people have preferences for social outcomes such as economic equality.

We and other researchers have shown that individual preferences for relative standing and social outcomes can have very strong implications for the economic policy.

Earlier research has focused on the implications of social comparisons for redistributive taxation and public good provision without any reference to education policy. In practice, we know that education has a large impact on the economic inequality.

One purpose of the project is to further develop this research area by integrating human capital formation and the policy implications thereof in economic environments with social comparisons and inequality.

A second aim is to address policy implications of social exclusion in model-economies with social comparisons, which is important because social exclusion is associated with large individual and social costs, and can also lead to political polarization.

A third aim is to integrate Mirrlees’ continuous and Stiglitz’s discrete approaches to optimal nonlinear taxation, which gives a unified framework for addressing the research questions at hand that makes use of the advantages of both approaches.