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Estimating the parameter of inequality aversion on the basis of a parametric distribution of incomes

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  • Stanislaw Maciej Kot

    (Gdansk University of Technology, Poland)

Abstract

Research background: In applied welfare economics, the constant relative inequality aversion function is routinely used as the model of a social decisionmaker’s or a society’s preferences over income distributions. This function is entirely determined by the parameter, ?, of inequality aversion. However, there is no authoritative answer to the question of what the range of ? an analyst should select for empirical work. Purpose of the article: The aim of this paper is elaborating the method of deriving ? from a parametric distribution of disposable incomes. Methods: We assume that households’ disposable incomes obey the generalised beta distribution of the second kind GB2(a,b,p,q). We have proved that, under this assumption, the social welfare function exists if and only if ? belongs to (0,ap+1) interval. The midpoint ?mid of this interval specifies the inequality aversion of the median social-decisionmaker. Findings & Value added: The maximum likelihood estimator of ?mid has been developed. Inequality aversion for Poland 1998–2015 has been estimated. If inequality is calculated on the basis of disposable incomes, the standard inequality–development relationship might be complemented by inequality aversion. The “augmented” inequality–development relationship reveals new phenomena; for instance, the stage of economic development might matter when assessing the impact of inequality aversion on income inequality.

Suggested Citation

  • Stanislaw Maciej Kot, 2020. "Estimating the parameter of inequality aversion on the basis of a parametric distribution of incomes," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 15(3), pages 391-417, September.
    • Handle: RePEc:pes:ierequ:v:15:y:2020:i:3:p:391-417
    DOI: 10.24136/eq.2020.018
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    Cited by:

    1. Stanislaw Maciej Kot, 2023. "Equivalence scales for continuous distributions of expenditure," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 18(1), pages 185-218, March.
    2. Stanislaw Maciej Kot & Piotr Paradowski, 2022. "The Atlas of Inequality Aversion: Theory and Empirical Evidence from the Luxembourg Income Study Database," LIS Working papers 826, LIS Cross-National Data Center in Luxembourg.
    3. Stanislaw Maciej Kot & Piotr R. Paradowski, 2022. "The atlas of inequality aversion: theory and empirical evidence on 55 countries from the Luxembourg Income Study database," Equilibrium. Quarterly Journal of Economics and Economic Policy, Institute of Economic Research, vol. 17(2), pages 261-316, June.

    More about this item

    Keywords

    income inequality; inequality aversion; estimation; income distribution;
    All these keywords.

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • I31 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General Welfare, Well-Being

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