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Separable utility and taste-independence

Working Paper 2021-572

Abstract

We provide an escape route from the opportunity paradox, which is described as a conflict between the ex ante and the ex post perspectives of compensation, by restricting the preference domain. Taste-independent utility is introduced as a property of preferences such that individuals’ maximized utility levels are the same regardless of their tastes for work. Using the optimal income taxation model, we demonstrate that if parametric utility functions are separable in consumption and labor supply, then they are taste-independent. We obtain a compatibility theorem when utility functions are quasilinear in consumption.

Authors: Jun Matsui.

Keywords: Opportunity, Compensation, Domain restriction
JEL: D63