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Social Welfare Analysis of Income Distributions: Ranking Income Distributions with Crossing Generalised Lorenz Curves

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  • Bellù, Lorenzo Giovanni
  • Liberati, Paolo

Abstract

This paper illustrates how Crossing Generalised Lorenz (GL) curves can be used to identify the best income distribution on social welfare grounds within a set of alternative income distributions generated by different policy options. It starts by illustrating two alternative income distributions resulting from policy changes that lead to income increases for some individuals and decreases for others. GL curves are then calculated for the alternative distributions to rank them on welfare grounds on the basis of Shorrocks’ Theorem. After observing that Shorrocks’ Theorem is not applicable, because GL curves cross once, necessary additional conditions, such as restrictions on the features of the Social Welfare Function (SWF) and the shape of income distributions, are set and discussed. Subsequently, a step-by-step procedure to use GL curves to infer welfare judgments when GL cross once, is provided and illustrated with some simple numerical examples.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 30115.

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Date of creation: 01 Nov 2005
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Handle: RePEc:pra:mprapa:30115

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Keywords: crossing generalised lorenz (GL) curves; social welfare; income distribution; poverty; Shorrocks’ Theorem; social welfare funtion; Rawlsian; diminishing transfers; utilitarian preferences;

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