Poverty and Welfare Measurement on the Basis of Prospect Theory

Markus Jantti, Ravi Kanbur, Milla Nyyssölä and Jukka Pirttilä

No 4095, CESifo Working Paper Series from CESifo

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 (search for similar items in EconPapers)
JEL-codes: I32 O12 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Poverty and Welfare Measurement on the Basis of Prospect Theory (2014)
Working Paper: Poverty and Welfare Measurement on the Basis of Prospect Theory (2013)
Working Paper: Poverty and Welfare Measurement on the Basis of Prospect Theory (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_4095

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