Abstract
The conditional equality and egalitarian equivalence criteria were proposed by Fleurbaey (Fairness, responsibility, and welfare, Oxford University Press, Oxford, 2008) to provide better foundations to interpersonal comparisons in the context of heterogeneous preferences and multidimensional welfare. The first implementations of the egalitarian equivalence criterion follow an approach where the preferences are captured at the group level (based on socio-demographic variables) rather than at the individual level. Our contribution is to extend these models by using information on individual preferences, derived from the potential discrepancy between the group level optimal choice and the revealed choice of the individuals. We implement and compare the conditional equality and egalitarian equivalence criteria on a 2004 US microeconomic dataset and find that these criteria are relatively consistent in the identification of the worst-off. We also show that up to 18 % of the worst-off are no longer categorized as worst-off when the empirical approach accounts for individual preferences.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
See Decoster and Haan (2010) for the preliminary version of the paper.
This discretization is convenient for the estimation procedure. It also allows to better account for the non-linearities in the budget set (due to progressive taxes). It finally reflects the effective choice of the individuals who have in principle not an infinite number of working hours options. Such choices are usually discrete.
This is an alternative to the approach of Decoster and Haan (2015), limited to married households, with the labor choice of married woman as the focus, and the assumption that male income is a non-labor income.
A type 1 extreme value distributed random variable \(\epsilon \) has density \(f(\epsilon )=e^{-\epsilon }exp(-e^{-\epsilon })\) and cumulative distribution function \(F(\epsilon )=exp(-e^{-\epsilon })\). See Cameron and Trivedi (2005), p. 477 for more details.
Note that the deterministic component of utility \(u_{ij}\) can be dominated in some cases by more than one alternative.
We generate one million random numbers from a type 1 extreme value distribution to get a first set of \(\epsilon \)’s, repeat the procedure to obtain a second set of \(\epsilon \)’s, then take the differences, discard the values smaller or equal to \(u_{ik}-u_{ij}\) and finally compute the respective averages of the differences to estimate \(E(\epsilon _{ij}-\epsilon _{ik} | \epsilon _{ij}-\epsilon _{ik}> u_{ik}-u_{ij}) \).
As we have poor information on transfers given to people who do not work, we restrict our analysis to individuals least affected by transfers.
Capital income would affect the level of the budget set and probably the decision of working or not. Since we have no disaggregation or information on the source of capital income, and since taxes depend on the sources of this income, we choose to exclude the individuals with a capital income superior to 10 % of labor income.
The median of the empirical distribution in the following intervals define the discrete points: [17.5–22.5], [22.5–27.5], [27.5–32.5], [32.5–37.5], [37.5–42.5], [42.5–47.5], [47.5–52.5], \(>\) 52.5.
Seven tax brackets with rates of 0, 10, 15, 25, 28, 33 and 35 % respectively, and bracket income limits at USD 8200, USD 15500, USD 29700, USD 71950, USD 150150 and USD 326450.
A part of this low percentage is due to individual heterogeneous preferences, but another part is also due to the imperfect fitting of the model to the data. It can come from different sources including (i) the Cox-Box specification of the deterministic part of the utility function, (ii) the determination of the budget constraint (including the neglect of capital income), and (iii) the discretization of labor supply. There is unfortunately no convincing way of disentangling the respective contribution of these factors.
Results not reported, available on request.
References
Aaberge R, Dagsvik JK, Strom S (1995) Labor supply responses and welfare effects of tax reforms. Scand J Econ 97(4):635–659
Aaberge R, Colombino U, Strøm S, Wennemo T (2000) Joint labour supply of married couples: efficiency and distribution effects of tax and labor market reforms. In: Mitton L, Sutherland H, Weeks H (eds) Microsimulation modelling for policy analysis: Challenges and innovations. Cambridge University Press, Cambridge
Aaberge R, Colombino U, Strom S (2004) Do more equal slices shrink the cake? An empirical investigation of tax-transfer reform proposals in Italy. J Popul Econ 17(4):767–785
Aaberge R, Colombino U (2014) Labour supply models. In: O’Donoghue C (ed) Handbook of microsimulation modelling (contributions to economic analysis), 293rd edn. Emerald Group Publishing Limited, Bingley, pp 167–221
Almas I, Cappelen AW, Lind JT, Sorensen EO, Tungodden B (2011) Measuring unfair (in)equality. J Public Econ 95(7–8):488–499
Bargain O, Decoster A, Dolls M, Neumann D, Peichl A, Siegloch S (2013) Welfare, labor supply and heterogeneous preferences: evidence for Europe and the US. Soc Choice Welf 41(4):789–817
Bonin H, Schneider H (2006) Analytical prediction of transition probabilities in the conditional logit model. Econ Lett Elsevier 90(1):102–107
Bossert W (1995) Redistribution mechanisms based on individual characteristics. Math Soc Sci 29:1:17
Bossert W, Fleurbaey M (1996) Redistribution and compensation. Soc Choice Welf 13(3):343–355
Box GEP, Cox DR (1964) An analysis of transformations. J R Stat Soc Ser B (Methodol) 26(2):211–252
Cameron AC, Trivedi PK (2005) Microeconometrics: methods and applications. Cambridge University Press, New York
Decoster A, Haan P (2010) Empirical welfare analysis in random utility models of labour supply. Institute for the Study of Labour (IZA), Discussion Paper 5301
Decoster A, Haan P (2015) Empirical welfare analysis with preference heterogeneity. Int Tax Public Financ 22:224–251
Devooght K (2005) To each the same and to each his own. A proposal to measure responsibility-sensitive income inequality. Econ Lond School Econ Polit Sci 75(298):280–295
Dworkin R (1981) What is equality: part 1: equality of welfare. Philos Public Aff 10(3):186–245
Dworkin R (1981) What is equality: part 2: equality of resources. Philos Public Aff 10(3):283–345
Fleurbaey M (1995) Three solutions for the compensation problem. J Econ Theory 65(2):505–521
Fleurbaey M (2008) Fairness, responsibility, and welfare. Oxford University Press, Oxford
Fleurbaey M, Maniquet F (2005) Fair social orderings when agents have unequal production skills. Soc Choice Welf 24(1):93–127
Fleurbaey M, Maniquet F (2006) Fair income tax. Rev Econ Stud 73(1):55–83
Fleurbaey M, Maniquet F (2011) Compensation and responsibility. In: Arrow KJ, Sen AK, Suzumura K (eds) Handbook of social choice and welfare, vol 2. Elsevier, Amsterdam, pp 507–604
McFadden D (1974) Coniditional logit analysis of qualitative choice behavior. In: Zarembka P (ed) Frontiers in econometrics. Academic Press, New York, pp 105–142
Rawls J (2006) Justice as fairness. In: Goodin RE, Pettit P (eds) Contemporary political philosophy. Blackwell philosophical anthologies, Blackwell, Oxford, pp 185–200
Schokkaert E, Van de gaer D, Vandenbroucke F, Luttens RI (2004) Responsibility sensitive egalitarianism and optimal linear income taxation. Math Soc Sci 48(2):151–182
van Soest A (1995) Structural models of family labor supply: a discrete choice approach. J Hum Resour 30(1):63–88
Author information
Authors and Affiliations
Corresponding author
Additional information
The authors thank the participants of the FUSL CEREC seminars, the 2011 AFSE meeting, the 2011 OPHI conference, the Social Welfare seminars at CORE UCL, the CEPS/INSTEAD seminars in Luxembourg and the 2015 ECINEQ conference. They are especially grateful to André Decoster, Francisco Ferreira, Marc Fleurbaey, François Maniquet, Kristian Orsini, Andreas Peichl, Xavier Ramos, Juan Gabriel Rodriguez, Erik Schokkaert, Dirk Van de gaer, Skerdilajda Zanaj and three anonymous referees for their helpful comments and suggestions. The usual disclaimers apply.
Rights and permissions
About this article
Cite this article
Carpantier, JF., Sapata, C. Empirical welfare analysis: when preferences matter. Soc Choice Welf 46, 521–542 (2016). https://doi.org/10.1007/s00355-015-0927-y
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00355-015-0927-y