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

  • Creedy, John
  • Halvorsen, Elin
  • Thoresen, Thor

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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File URL: http://researcharchive.vuw.ac.nz/handle/10063/2434
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Paper provided by Victoria University of Wellington, Chair in Public Finance in its series Working Paper Series with number 2434.

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Date of creation: 2012
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Handle: RePEc:vuw:vuwcpf:2434
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School of Accounting & Commercial Law, Victoria University of Wellington, PO Box 600, Wellington, New Zealand

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Web page: http://www.victoria.ac.nz/sacl/about/chair-in-public-finance
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