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Poverty and welfare measurement on the basis of prospect theory

Citation

Jäntti, Markus; Kanbur, Ravi; Nyyssölä, Milla; & Pirttilä, Jukka (2014). Poverty and welfare measurement on the basis of prospect theory. Review of Income and Wealth, 60(1), 182-205.

Abstract

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 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 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 Russia and Vietnam.

URL

http://dx.doi.org/10.1111/roiw.12095

Reference Type

Journal Article

Year Published

2014

Journal Title

Review of Income and Wealth

Author(s)

Jäntti, Markus
Kanbur, Ravi
Nyyssölä, Milla
Pirttilä, Jukka