Optimal Income Distribution Rules and Representative Consumers.

This paper derives observable properties of economies with optimal income distribution rules that specify consumers' incomes as functions of aggregate income and prices. Optimality implies that the aggregate demand function is generated by a single 'representative' consumer. The author derives an additional implication which, when consumers receive fixed shares of aggregate income, requires that the consumers' demands become more dispersed when aggregate income rises. This last condition has empirical support. The results relate the representative consumer's preferences to a version of Kaldor's compensation criterion and show when both can be used for normative analysis without internal inconsistency. Copyright 1994 by The Review of Economic Studies Limited.