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Poverty and Welfare Measurement on the Basis of Prospect Theory

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  • Markus Jäntti
  • Ravi Kanbur
  • Milla Nyyssölä
  • Jukka Pirttilä

Abstract

This paper examines the measurement of social welfare, poverty and inequality taking into account 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 utility function, as he/she 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.

Suggested Citation

  • Markus Jäntti & Ravi Kanbur & Milla Nyyssölä & Jukka Pirttilä, 2013. "Poverty and Welfare Measurement on the Basis of Prospect Theory," CESifo Working Paper Series 4095, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_4095
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Jantti, Markus & Jenkins, Stephen P., 2013. "Income mobility," ISER Working Paper Series 2013-23, Institute for Social and Economic Research.
    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. repec:kap:theord:v:83:y:2017:i:3:d:10.1007_s11238-017-9599-7 is not listed on IDEAS
    4. 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.
    5. Povel, Felix, 2015. "Measuring Exposure to Downside Risk with an Application to Thailand and Vietnam," World Development, Elsevier, vol. 71(C), pages 4-24.
    6. Garth Heutel, 2017. "Prospect Theory and Energy Efficiency," NBER Working Papers 23692, National Bureau of Economic Research, Inc.
    7. 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.

    More about this item

    Keywords

    Prospect Theory; poverty; inequality; welfare measurement; vulnerability;

    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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