Interpersonal Comparisons by Means of Money Metric Utilities

Why One Should Use the Same Reference Prices for All

Authors

Keywords:

money metric utility, wee-being measurement, equivalent variation, labour supply

Abstract

We show that using different reference prices for different individuals in money metrics of well-being leads to violations of several normative properties of interpersonal welfare comparisons that have become popular in the fairness literature. An empirical illustration for Belgian single adults available for the labour market in 2015 show that the violation of these principles in the labour consumption context, is all but exceptional.

References

Aaberge, R., J.K. Dagsvik, and S. Strøm 1995 “Labor supply responses and welfare effects of tax reforms”, Scandinavian Journal of Economics 97(4): 635–659.

—–, U. Colombino, S. Strøm 2000 “Labor supply responses and welfare effects from replacing current tax rules by a flat tax: Empirical evidence from Italy, Norway and Sweden”, Journal of Population Economics 13(4): 595–621. doi.org/10.1007/s001480050153

Bhattacharya, D. 2015 “Nonparametric welfare analysis for discrete choice”, Econometrica 83(2): 617–649. doi.org/10.3982/ECTA12574

Blackorby, C., and D. Donaldson 1990 “A review article: The case against the use of the sum of compensating variations in cost–benefit analysis”, Canadian Journal of Economics – Revue canadienne d’économique 13(3): 471–494.

—–, F. Laisney, and R. Schmachtenberg 1994 “Ethically–consistent welfare prescriptions are reference-price-independent”, in R.W. Blundell, I. Preston, and I. Walker (Eds.) The Measurement of Household Welfare Cambridge: Cambridge University Press. pp. 247–264.

Blundell, R.W., I. Preston, and I. Walker 1994 “An introduction to applied welfare analysis”, in R.W. Blundell, I. Preston, I. Walker (Eds.) The Measurement of Household Welfare Cambridge: Cambridge University Press. pp. 1–50.

Boadway, R.W. 1974 “The welfare foundations of cost–benefit analysis”, Economic Journal 84(336): 926–939. doi.org/10.2307/2230574

Bossert, W., P.K. Pattanaik, and Y. Xu 1994 “Ranking opportunity sets: An axiomatic approach”, Journal of Economic Theory 63(2): 326–345. doi.org/10.1006/jeth.1994.1045

Capéau, B., A. Decoster, and D. Neumann 2016 “Some properties of the choice of reference wage for the equivalent income metric”, mimeo.

—–, A. Decoster, S. Maes, and T. Vanheukelom 2018 “Piecemeal modelling of the effects of joint direct and indirect tax reforms” EUROMOD Working Papers EM14/18.

Carpantier, J.F., and C. Sapata 2016 “Empirical welfare analysis: when preferences matter”, Social Choice and Welfare 46(3): 521–542. doi.org/10.1007/s00355-015-0927-y

Cherchye, L., S. Cosaert, B. De Rock, P.J. Kerstens, and F. Vermeulen 2018 “Individual welfare analysis for collective households”, Journal of Public Economics 166: 98–114.

—–, B. De Rock, A. Lewbel, and F. Vermeulen 2015 “Sharing rule identification for general collective consumption models”, Econometrica 83(5): 2001–2041. doi.org/10.3982/ECTA10839

Cherchye, L., B. De Rock, and F. Vermeulen 2011 “The revealed preference approach to collective consumption behaviour: Testing and sharing rule recovery”, Review of Economic Studies 78(1): 176–198. doi.org/10.1093/restud/rdq018

Chiappori, P.-A. 2016 “Welfare and the household” in M.D. Adler and M. Fleurbaey (Eds.), The Oxford Handbook of Well–being and Public Policy New York: Oxford University Press. pp. 785–843.

—–, and C. Meghir 2015 “Intrahousehold Inequality”, in A.B. Atkinson and F. Bourguignon (Eds) Handbook of Income Distribution Vol. 2B Amsterdam: North-Holland. pp. 1369–1418. doi.org/10.1016/B978-0-444-59429-7.00017-0

Creedy, J., N. Hérault, and G. Kalb 2011 “Measuring welfare changes in behavioural micro simulation modeling: Accounting for the random utility component” Journal of Applied Economics 14(1): 5–34. doi.org/10.1016/S1514-0326(11)60003-2

—–, and G. Kalb 2005 “Measuring welfare changes in labour supply models” The Manchester School 73(6): 664–685. doi.org/10.1111/j.1467-9957.2005.00471.x

Dagsvik, J.K., and A. Karlström 2005 “Compensating variation and Hicksian choice probabilities in random utility models that are nonlinear in income”, The Review of Economic Studies 72(1): 57–76. doi.org/10.1111/0034-6527.00324

—–, M. Locatelli, and S. Strøm 2009 “Tax reform, sector–specific labor supply and welfare effects”, Scandinavian Journal of Economics 111(2): 299–321. doi.org/10.1111/j.1467-9442.2009.01565.x

Decancq, K., M. Fleurbaey, and E. Schokkaert 2015 “Happiness, equivalent incomes and respect for individual preferences”, Economica 82(s1): 1082–1106. doi.org/10.1111/ecca.12152

—–, M. Fleurbaey, and E. Schokkaert 2017 “Well-being inequality and preference heterogeneity”, Economica 84(334): 210–238. doi.org/10.1111/ecca.12231

—–, M. Fleurbaey, and F. Maniquet 2019 “Multidimensional poverty measurement with individual preferences”, Journal of Economic Inequality 17(1): 29–49 doi.org/10.1007/s10888-019-09407-9.

De Sadeleer, L. 2017 “A study of well–being and inequality with preference based individual welfare metrics applied to the income–leisure choice for singles and couples”, Masters thesis, Department of Economics, KU Leuven.

Donaldson, D. 1992 “On the aggregation of money measures of well–being in applied welfare analysis”, Journal of Agricultural and Resource Economics 17(1): 88–102.

Ferrando, M. 2018 “Intra–household allocations with public goods: A new source of gender inequality”, mimeo.

Fleurbaey, M. 2008 Fairness, Responsibility, and Welfare Oxford: Oxford University Press.

—– 2011 “Willingness-to-pay and the equivalence approach”, Revue d’Économie Politique 121(1): 35–58. doi.org/10.3917/redp.211.0035

—–, and D. Blanchet 2013 Beyond GDP: Measuring Welfare and assessing Sustainability Oxford: Oxford University Press.

—–, and F. Maniquet 2011 A Theory of Fairness and Social Welfare Cambridge: Cambridge University Press.

—– 2017 “Fairness and well–being measurement”, Mathematical Social Sciences 90: 119–126. doi.org/10.1016/j.mathsocsci.2016.11.003

—– 2018 “Inequality-averse well-being measurement”, International Journal of Economic Theory 14(1): 35–50. doi.org/10.1111/ijet.12140

Gul, F., and W. Pesendorfer 2001 “Temptation and self–control”, Econometrica 69(6): 1403–1435. doi.org/10.1111/1468-0262.00252.

King, M.A. 1983 “Welfare analysis of tax reforms using household data”, Journal of Public Economics 21(2): 183–214. doi.org/10.1016/0047-2727(83)90049-X

—– 1987 “The empirical analysis analysis of tax reforms”, in T.F. Bewley (Ed.) Advances in Econometrics: Fifth World Congress Vol. 2 Cambridge: Cambridge University Press. pp. 61–90.

McFadden, D. 1999 “Computing willingness–to–pay in random utility models”, in J.R. Melvin, J.C. Moore, and R. Riezman (Eds.) Trade, Theory and Econometrics. Essays in honor of John S. Chipman London and New York: Routledge. pp. 253–274.

Pauwels, W. 1978 “The possible perverse behavior of the compensating variation as a welfare ranking”, Zeitschrift für Nationalökonomie/Journal of Economics 38(3–4): 369–378.

—– 1986 “Correct and incorrect measures of the deadweight loss of taxation”, Public Finance – Finances Publiques 41(2): 267–276.

Roemer, J.E., and A. Trannoy 2015 “Equality of opportunity”, in A.B. Atkinson and F. Bourguignon (Eds.) Handbook of Income Distribution Vol. 2A. Amsterdam: North-Holland. pp. 217–300. doi.org/10.1016/B978-0-444-59428-0.00005-9

—– 2016 “Equality of opportunity: Theory and measurement”, Journal of Economic Literature 54(4): 1288–1332. doi.org/10.1257/jel.20151206

Small, K.A., and H.S. Rosen 1981 “Applied welfare economics with discrete choice models”, Econometrica 49(1): 105–130. doi.org/10.2307/1911129

Weymark, J.A. 1985 “Money metric utility functions”, International Economic Review 26(1): 219–232. doi.org/10.2307/2526537

Published

2024-01-21

How to Cite

Capéau, B., Decoster, A., & De Sadeleer, L. (2024). Interpersonal Comparisons by Means of Money Metric Utilities: Why One Should Use the Same Reference Prices for All. Journal of Income Distribution®, 32(3-4). Retrieved from https://jid.journals.yorku.ca/index.php/jid/article/view/40598

Similar Articles

<< < 3 4 5 6 7 8 9 10 11 12 > >> 

You may also start an advanced similarity search for this article.