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Dominance concepts for discrete Fehr-Schmidt preferences with a focus on income inequality

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  • Sanjit Dhami
  • Ali al-Nowaihi

Abstract

The evidence for other-regarding preferences is extensive. How should an individual with other-regarding preferences compare two distinct distributions of income? We show that the classical concepts of first and second order stochastic dominance are inadequate to answer this question. We develop the relevant stochastic dominance concepts for the case of the popular other-regarding preferences in Fehr and Schmidt (1999) that we call FS preferences; we consider the linear and non-linear forms of FS preferences. These new dominance concepts, that we call first and second order FS dominance provide sufficient conditions for ranking income distributions. We show that our concepts can be extended to uncertainty and are applicable to some other models of other-regarding preferences. Our use of a discrete framework is empirically realistic and avoids measure theoretic issues arising under the continuous case.

Suggested Citation

  • Sanjit Dhami & Ali al-Nowaihi, 2017. "Dominance concepts for discrete Fehr-Schmidt preferences with a focus on income inequality," Discussion Papers in Economics 17/12, Division of Economics, School of Business, University of Leicester.
    • Handle: RePEc:lec:leecon:17/12
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    References listed on IDEAS

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    More about this item

    Keywords

    Other-regarding preferences; first order FS dominance; second order FS dominance; weak FS dominance.;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers

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