Poverty and Welfare Measurement on the Basis of Prospect Theory

39 Pages Posted: 12 Feb 2013

See all articles by Markus Jantti

Markus Jantti

Stockholm University

Ravi Kanbur

Cornell University; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Milla Nyyssölä

Aalto University

Jukka Pirttila

United Nations - World Institute for Development Economics Research (UNU/WIDER); Tampere University of Technology

Multiple version iconThere are 2 versions of this paper

Date Written: January 31, 2013

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.

Keywords: Prospect Theory, poverty, inequality, welfare measurement, vulnerability

JEL Classification: I320, O120

Suggested Citation

Jantti, Markus and Kanbur, Ravi and Nyyssola, Milla and Pirttila, Jukka, Poverty and Welfare Measurement on the Basis of Prospect Theory (January 31, 2013). CESifo Working Paper Series No. 4095. Available at SSRN: https://ssrn.com/abstract=2214898

Markus Jantti

Stockholm University ( email )

Swedish Institute for Social Research
Stockholm, SE-10691
Sweden
+468162645 (Phone)

HOME PAGE: http://www.abo.fi/~mjantti/

Ravi Kanbur

Cornell University ( email )

301-J Warren Hall
Ithaca, NY 14853
United States
607-255-7966 (Phone)
607-255-9984 (Fax)

HOME PAGE: http://www.kanbur.dyson.cornell.edu

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Milla Nyyssola

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101
Finland

Jukka Pirttila (Contact Author)

United Nations - World Institute for Development Economics Research (UNU/WIDER) ( email )

Katajanokanlaituri 6B
Helsinki, FIN-00160
Finland

Tampere University of Technology ( email )

P.O. 541, Korkeakoulunkatu 8 (Festia building)
Tampere, FI-33101
Finland

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