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Inequality Comparisons in a Multi-Period Framework: The Role of Alternative Welfare Metrics

  • John Creedy
  • Elin Halvorsen
  • Thor O. Thoresen

This paper considers the use of alternative welfare metrics in evaluations of income inequality in a multi-period context. Using Norwegian longitudinal income data, it is found, as in many studies, that inequality is lower when each individual’s annual average income is used as welfare metric, compared with the use of a single-period accounting framework. However, this result does not necessarily hold when aversion to income fluctuations is introduced. Furthermore, when actual incomes are replaced by expected incomes (conditional on an initial period),using a model of income dynamics, higher values of inequality over longer periods are typically found, although comparisons depend on inequality and variability aversion parameters. The results are strongly influenced by the observed high degree of systematic regression towards the (geometric) mean, combined with a large extent of individual unexpected effects.

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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 1127.

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Length: 19 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:mlb:wpaper:1127
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