Discussion Papers on Economics,
University of Southern Denmark, Department of Economics

Abstract: We study the fair allocation of a one-dimensional and perfectly divisible good when individuals have other-regarding preferences. Assuming no legitimate claims and purely ordinal preferences, how should society measure social welfare so as to satisfy basic principles of efficiency and fairness? We define the egalitarian equivalent as the size of the egalitarian allocation which leaves the individual indifferent to the current allocation. In two simple models of average and positional externalities, we characterize the class of social preferences which give full priority to the individual with the lowest egalitarian equivalent in the economy.

Keywords: Fair allocation; social welfare; externalities; behavioral economics

JEL-codes: D62; D63; D64; D71

32 pages, December 19, 2014

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