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Inequality and welfare evaluation of heterogeneous income distributions

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  • Anthony Shorrocks

Abstract

This paper establishes the principles that should govern the welfare and inequality analysis of heterogeneous income distributions. Two basic criteria – the ‘equity preference’ condition and the ‘compensation principle’ – are shown to be fundamentally incompatible. The paper favours the latter, thereby vindicating the traditional method of dealing with heterogeneous samples. However, inequality and welfare comparisons will usually be well defined only if equivalent incomes are obtained using constant scale factors; and researchers will need to distinguish clearly between inequality of nominal incomes and inequality of living standards. Furthermore, household observations must always be weighted according to family size. Copyright Kluwer Academic Publishers 2004

Suggested Citation

  • Anthony Shorrocks, 2004. "Inequality and welfare evaluation of heterogeneous income distributions," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 2(3), pages 193-218, July.
  • Handle: RePEc:kap:jecinq:v:2:y:2004:i:3:p:193-218
    DOI: 10.1007/s10888-004-3459-8
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    References listed on IDEAS

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