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Poverty and Welfare Measurement on the Basis of Prospect Theory


  • Jantti, Markus
  • Kanbur, Ravi
  • Nyyssola, Milla
  • Pirttila, Jukka


This paper examines the measurement of social welfare, poverty, and inequality, taking into account features that have been found to be important welfare determinants in behavioral economics. Most notably, we incorporate reference-dependence, loss aversion, and diminishing sensitivity—aspects emphasized in Prospect Theory—to social welfare measurement. We suggest a new notion of equivalent income, the income level with which the individual would be as well off, evaluated using a standard concave utility function, as he actually is, evaluated with a reference-dependent utility function. We examine the differences between standard poverty and inequality measures based on observed income and measures that are calculated based on equivalent income. These differences are illustrated using household-level panel data from Russia and Vietnam.
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  • Jantti, Markus & Kanbur, Ravi & Nyyssola, Milla & Pirttila, Jukka, 2013. "Poverty and Welfare Measurement on the Basis of Prospect Theory," Working Papers 180093, Cornell University, Department of Applied Economics and Management.
  • Handle: RePEc:ags:cudawp:180093

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    Cited by:

    1. Markus Jäntti & Stephen P. Jenkins, 2013. "Income Mobility," SOEPpapers on Multidisciplinary Panel Data Research 607, DIW Berlin, The German Socio-Economic Panel (SOEP).
    2. Markus Jäntti & Ravi Kanbur & Milla Nyyssölä & Jukka Pirttilä, 2014. "Poverty and Welfare Measurement on the Basis of Prospect Theory," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(1), pages 182-205, March.
    3. Garth Heutel, 2017. "Prospect Theory and Energy Efficiency," NBER Working Papers 23692, National Bureau of Economic Research, Inc.
    4. repec:kap:theord:v:83:y:2017:i:3:d:10.1007_s11238-017-9599-7 is not listed on IDEAS
    5. Travis J. Lybbert & Bruce Wydick, 2017. "Hope as Aspirations, Agency, and Pathways: Poverty Dynamics and Microfinance in Oaxaca, Mexico," NBER Chapters,in: The Economics of Poverty Traps National Bureau of Economic Research, Inc.
    6. Nicolas Herault, 2015. "How Income Mobility and Income Growth Explain Income Inequality Trends," Melbourne Institute Working Paper Series wp2015n14, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    7. Povel, Felix, 2015. "Measuring Exposure to Downside Risk with an Application to Thailand and Vietnam," World Development, Elsevier, vol. 71(C), pages 4-24.

    More about this item


    Political Economy; Production Economics;

    JEL classification:

    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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