How Sustainable is Need-Based Redistribution?

This chapter examines the economic sustainability of need-based income redistribution via the welfare state. We model the welfare state as an insurance device to reduce the variance of lifetime incomes when social inequality results from individual risk-taking, specifically educational investment. Our contract-theoretic model analysis shows that income redistribution can lead to higher efficiency and overall welfare under certain conditions. In this context, need-based redistribution, which includes an explicit means test, is clearly superior to an unconditional basic income. Experimental tests of the model confirm the hypothesis that need-based redistribution is sustainable. From our theoretical and experimental results, we conclude that a lexicographic combination of need-based justice and equity—the Boulding principle—not only reflects the redistribution preferences of the population well, but is also convincing from an ethical perspective.