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Poverty and Welfare Measurement on the Basis of P rospect Theory
Author(s) -
Jäntti Markus,
Kanbur Ravi,
Nyyssölä Milla,
Pirttilä Jukka
Publication year - 2014
Publication title -
review of income and wealth
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.024
H-Index - 57
eISSN - 1475-4991
pISSN - 0034-6586
DOI - 10.1111/roiw.12095
Subject(s) - economics , poverty , welfare , social welfare function , inequality , panel data , social welfare , public economics , function (biology) , econometrics , economic inequality , welfare economics , demographic economics , microeconomics , economic growth , mathematics , mathematical analysis , evolutionary biology , political science , law , market economy , biology
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 P rospect T heory—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 R ussia and V ietnam.