This paper discusses different forms of transfer from a group of rich individuals to a group of poor individuals. This transfer is based on the philanthropic motive of the donor, who is not indifferent to the use of his contribution. In particular, the poor individual's vector of consumption is entered as a part in the donor's utility function. This approach to an income transfer as a political or philanthropic decision extends the classical work of Franklin M. Fisher (1977) and it can explain the use of transfer in kind to the poor (e.g., free education and medical care) rather than strict income transfer. Similar types of transfer in kind are observed in a family context, between parents and children, as well as in an international program of aid, from the developed to the less-developed countries. The analysis shows that a combination of income transfer with specific subsidy to the poor consumer can lead to an optimal solution (first best) from the donor's point of view. In this case, one can achieve a solution which is equivalent to pure transfer in kind. If a specific solution is not feasible (i.e., it is not possible to discriminate between consumers of the product), we show that an optimal solution from the point of view of the rich (in some cases second best) can be obtained in a system of subsidy to all consumers. This result is interesting as a subsidy to consumers, and is a part of the optimal solution. The literature of public finance has recommended that a subsidy to the consumption of goods is non-optimal and should be replaced by a pure income transfer (lump sum). We have shown that one considers the preference of the rich with regard to the consumption vector of the poor, a combined policy of income transfer and subsidy may be preferred to a system of pure income transfer. We believe that our approach will help in the development of a political model of transfer between individuals within the state as well as between countries in the international context.
ASJC Scopus subject areas
- Sociology and Political Science
- Economics and Econometrics