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Poverty and Welfare Measurement on the Basis of Prospect Theory

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

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.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4095.

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Date of creation: 2013
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Handle: RePEc:ces:ceswps:_4095
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  1. Cesar Calvo & Stefan Dercon, 2007. "Chronic Poverty and All That: The Measurement of Poverty over Time," Economics Series Working Papers WPS/2007-04, University of Oxford, Department of Economics.
  2. 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.
  3. Yuriy Gorodnichenko & Klara Sabirianova Peter & Dmitriy Stolyarov, 2009. "Inequality and Volatility Moderation in Russia: Evidence from Micro-Level Panel Data on Consumption and Income," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0905, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
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  6. Adam S. Booij & Bernard M.S. Van Praag & Gijs Van De Kuilen, 2009. "A Parametric Analysis of Prospect Theory's Functionals for the General Population," CESifo Working Paper Series 2609, CESifo Group Munich.
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  23. Kanbur Ravi, 2001. "Economic Policy, Distribution and Poverty: The Nature of Disagreements," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 7(2), pages 1-26, April.
  24. James E. Foster & Indranil Dutta & Ajit Mishra, 2010. "On Measuring Vulnerability to Poverty," Working Papers 2010-13, The George Washington University, Institute for International Economic Policy.
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  26. Delavande, Adeline & Giné, Xavier & McKenzie, David, 2011. "Measuring subjective expectations in developing countries: A critical review and new evidence," Journal of Development Economics, Elsevier, vol. 94(2), pages 151-163, March.
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  29. Gaiha, Raghav & Imai, Katsushi, 2008. "Measuring Vulnerability and Poverty: Estimates for Rural India," Working Paper Series RP2008/40, World Institute for Development Economic Research (UNU-WIDER).
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  32. Jalan, Jyotsna & Ravallion, Martin, 1998. "Transient Poverty in Postreform Rural China," Journal of Comparative Economics, Elsevier, vol. 26(2), pages 338-357, June.
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