Poverty, Vulnerability, and Reference‐Dependent Utility

27 Pages Posted: 6 Feb 2014

See all articles by Isabel Günther

Isabel Günther

ETH Zürich - Department of Humanities, Social and Political Sciences (GESS)

Johannes Karl-Georg Maier

Ludwig Maximilian University of Munich (LMU)

Date Written: March 2014

Abstract

The numerous proposed measures of multi‐period poverty and vulnerability have until now not taken into account the insights from behavioral economics. In this paper we argue that recent evidence on individuals' decision making is of high relevance for the measurement of poverty when switching from a static and certain to a dynamic and uncertain framework. Building on reference‐dependent utility we propose new measures of both (perceived) multi‐period poverty and vulnerability, where the poverty status of an individual is a function not only of (expected) consumption levels but also of (expected) losses and gains in consumption. We demonstrate the implications of the proposed measures with a small illustrative example.

Keywords: loss aversion, multi‐period poverty, reference‐dependent utility, vulnerability

JEL Classification: D60, D81, I32

Suggested Citation

Günther, Isabel and Maier, Johannes Karl-Georg, Poverty, Vulnerability, and Reference‐Dependent Utility (March 2014). Review of Income and Wealth, Vol. 60, Issue 1, pp. 155-181, 2014, Available at SSRN: https://ssrn.com/abstract=2391543 or http://dx.doi.org/10.1111/roiw.12081

Isabel Günther (Contact Author)

ETH Zürich - Department of Humanities, Social and Political Sciences (GESS) ( email )

ETH-Zentrum SEW E 26
CH-8092 Zurich, Zurich 8006
Switzerland

Johannes Karl-Georg Maier

Ludwig Maximilian University of Munich (LMU) ( email )

Geschwister-Scholl-Platz 1
Munich, DE Bavaria 80539
Germany

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