The Principle of Strong Diminishing Transfer

We reconsider the principles of diminishing transfer (introduced by Kolm (1976)) and dual diminishing transfer (introduced by Mehran (1976)). It appears that if a Rank Dependent Expected Utility (RDEU) maximizer respects the principle of diminishing (resp. dual diminishing) transfer, then he behaves in accordance with the Expected Utility model (resp. Yaari’s dual model). This leads us to define the principle of strong diminishing transfer, which is a combination of the principles of diminishing and dual diminishing transfer. We give necessary conditions for a RDEU maximizer to respect this principle. These results are applied to the problem of inequality measurement. Journal of Economic Literature Classification Number: D63