Inequity Aversion, Welfare Measurement and the Gini Index

Abstract

Integrating individual inequity aversion into a utilitarian social welfare function, we derive a simple welfare measure which comprises both GDP and income inequality as measured by the Gini-index. The provided theoretical link between inequity aversion (popular in behavioural microeconomics) and the Gini-index (used in macroeconomic evaluations) strongly suggest that both measures indeed reflect the same empirically relevant aspect of reality, thereby giving substantial further warrant to either of them. As a kind of side effect, we provide a (so far missing) theoretical foundation for the Gini-Index.