OPTIMAL ALLOCATION AND TAXATION IN A FREE ENTERPRISE ECONOMY WITH STOCHASTIC INFLUENCES (INCOME DISTRIBUTION)

There are two principle objectives in this thesis. The first is to incorporate stochastic wage rates (income) and precommitted effort levels into several familiar problems of distribution and taxation. The second is to propose that deviations from the resulting optimal or expected outcomes are useful in predicting ex post voting behavior of constituents. Three specific problems are considered: fairness, taxation and optimal tariffs.; In the fairness model, first, we prove that the superfair solution requires equal income. Subsequently a "relative" or "conditional" measure of fairness which is the relative Rawlsian allocation and the conditional expectation is proposed. It is found that deviations from the conditionally fair allocation provides significant predictions of the ex post Presidential elections.; In the taxation model, under the assumptions of interactive strategy and stochastic dependency between two groups which are seldom mentioned from previous studies, we discuss four cases: simple, egalitarian, decisive voter, and leader-follower. Finally, we find that deviations from optimal or conditionally expected tax rates influence ex post elections in the same manner that deviations from fair allocations are shown to significantly predict voting in the fairness model.; In the tariff model, we view the tariff primarily as a tax. We include the egalitarian situation and the decisive voter situation.