Monday, June 18, 2012

Utility Paradox

Even ardent capitalist libertarians surely feel a little wince when a business event leads to a firing or pay-cut to the little guy while the rich owner gets a big bonus. Why?

Maybe it's because we think "dollars" but feel "utility." The marginal utility of your fifty millionth dollar is surely much smaller than that of your fiftieth dollar. Looked at this way, the business event creates wealth (through productivity gains) but destroys utility. I would estimate that the marginal utility of a dollar has only a gradual slope downward until it drops sharply once the amount reaches two years of expected pay. My SWAG.

How do you get around this paradox? Do the deal and take the productivity gain in dollars, then share a piece with the utility-loser? Why?

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