frank cowell: tu lisbon – inequality & poverty inequality: advanced topics july 2006...
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Frank C
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Inequality: Advanced Topics
July 2006 July 2006
Inequality and Poverty Measurement Inequality and Poverty Measurement
Technical University of LisbonTechnical University of Lisbon
Frank CowellFrank Cowellhttp://darp.lse.ac.uk/lisbon2006http://darp.lse.ac.uk/lisbon2006
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Overview...
Introduction
Inequality & responsibility
Deprivation
Complaints
Inequality: Advanced Topics
Themes and methodology
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Purpose of lecture We will look at recent theoretical developments We will look at recent theoretical developments
in distributional analysisin distributional analysis Consider some linked themes Consider some linked themes
alternative approaches to inequalityalternative approaches to inequality related welfare conceptsrelated welfare concepts
Use ideas from sociology and philosophyUse ideas from sociology and philosophy Focus on the way modern methodology is Focus on the way modern methodology is
appliedapplied
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Overview...
Introduction
Inequality & responsibility
Deprivation
Complaints
Inequality: Advanced Topics
An alternative approach
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Responsibility
Standard approach to case for redistributionStandard approach to case for redistribution Use reference point of equalityUse reference point of equality How effective is tax/benefit system in moving actual How effective is tax/benefit system in moving actual
distribution toward reference point?distribution toward reference point?
Does not take account of individual responsibility Does not take account of individual responsibility Role of individual actionsRole of individual actions The responsibility “cut” The responsibility “cut” Dworkin (1981a, 1981b)Dworkin (1981a, 1981b)
Distinguish between Distinguish between things that are your fault things that are your fault things for which you deserve compensationthings for which you deserve compensation
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Responsibility and redistribution
Should affect the evaluation of distributionsShould affect the evaluation of distributions Both case for redistribution...Both case for redistribution... ... and effectiveness of taxation.... and effectiveness of taxation.
Need to differentiate between Need to differentiate between characteristics for which people can be held characteristics for which people can be held
responsibleresponsible characteristics for which people should notcharacteristics for which people should not
Assume that these characteristics are known Assume that these characteristics are known and agreed...and agreed...
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Each person Each person ii has a vector of attributes has a vector of attributes a aii:: Attributes partitioned into two classesAttributes partitioned into two classes RR-attributes: for which the individual is responsible-attributes: for which the individual is responsible CC-attributes: for which the individual may be compensated-attributes: for which the individual may be compensated
Situation before intervention:Situation before intervention: Determined by income function Determined by income function ff ff maps attributes into incomes maps attributes into incomes ff((aaii)) Only person Only person ii’s attributes involved’s attributes involved
Situation after intervention:Situation after intervention: Determined by distribution rule Determined by distribution rule FF We need to compare fairness of outcomes from We need to compare fairness of outcomes from ff and and FF..
Basic structure
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Distribution rule
Also assume that the rule Also assume that the rule F F is anonymousis anonymous
The rule The rule FF: : depends on whole profile of attributesdepends on whole profile of attributes maps the attributes into income of maps the attributes into income of ii..
Assume feasibility:Assume feasibility:Profile of attributes
But what other principles should the rule But what other principles should the rule FF satisfy? satisfy?
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Responsibility: Principle EIER Bossert and Fleurbaey (1996)Bossert and Fleurbaey (1996) EEqual qual IIncome for ncome for EEqual qual RResponsibilityesponsibility
Focus on distribution itselfFocus on distribution itself Full compensationFull compensation
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Responsibility: Principle ETEC
EEqual qual TTransfers for ransfers for EEqual qual CC-attributes-attributes Focus on Focus on changeschanges in distribution in distribution Strict CompensationStrict Compensation
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A difficulty
Fleurbaey (1995a,b) In this special case... ...a natural redistribution mechanism
For large populations...For large populations... EIER and ETEC are incompatible except for...EIER and ETEC are incompatible except for... Additive separability:Additive separability:
Consider two compromise approaches
Consider two compromise approaches
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Compromise (1)
Insist on Full compensation (EIER) Weaken ETEC Egalitarian-equivalent mechanisms
Every agent has a post-tax income equal to the pre-tax income earned given reference compensation
characteristics plus... a uniform transfer
Reference profile
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Compromise (2)
Insist on strict compensation (ETEC) Weaken EIER Conditionally egalitarian mechanismsConditionally egalitarian mechanisms
Every agent Every agent kk is guaranteed the average income of a is guaranteed the average income of a hypothetical economyhypothetical economy In this economy all agents have characteristics equal to In this economy all agents have characteristics equal to
reference profilereference profile
Reference profile
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Application
The responsibility approach gives a reference income distributionThe responsibility approach gives a reference income distribution Exact version depends on balance of compensation rulesExact version depends on balance of compensation rules And on income function And on income function ff..
Redefine inequality measurementRedefine inequality measurement not based on perfect equality as a normnot based on perfect equality as a norm use the norm income distribution from the responsibility approachuse the norm income distribution from the responsibility approach
Devooght (2005) bases this on bases this on Cowell (1985) Cowell approach based on Theil’s conditional entropyCowell approach based on Theil’s conditional entropy Instead of looking at information content in going from perfect equality to Instead of looking at information content in going from perfect equality to
actual distribution...actual distribution... Start from the reference distributionStart from the reference distribution
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Overview...
Introduction
Inequality & responsibility
Deprivation
Complaints
Inequality: Advanced Topics
An economic interpretation of a sociological concept
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Themes Cross-disciplinary conceptsCross-disciplinary concepts Income differencesIncome differences Reference incomesReference incomes Formal methodologyFormal methodology
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Methodology Exploit common structureExploit common structure
povertypoverty deprivationdeprivation complaints and inequalitycomplaints and inequality see Cowell (2005) see Cowell (2005)
Axiomatic methodAxiomatic method minimalist approachminimalist approach characterise structurecharacterise structure introduce ethicsintroduce ethics
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“Structural” axioms
Take some social evaluation function Take some social evaluation function ContinuityContinuity
Linear homogeneityLinear homogeneity
Translation invarianceTranslation invariance
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Common structure
These assumptions underlie several problemsThese assumptions underlie several problems Already seen this with poverty axiomatisationAlready seen this with poverty axiomatisation Ebert and Moyes (2002)Ebert and Moyes (2002)
Apply this to other issues in distributional analysis Apply this to other issues in distributional analysis Individual deprivationIndividual deprivation Aggregate deprivationAggregate deprivation Inequality and complaintsInequality and complaints
Need to endow each individual problem withNeed to endow each individual problem with Ethical assumptionsEthical assumptions Reference level of incomeReference level of income
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Individual deprivation The The YitzhakiYitzhaki (1979) (1979) definition definition
Equivalent formEquivalent form
In present notationIn present notation
Use the conditional mean Use the conditional mean
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Deprivation: Axiomatic approach 1
The Better-than set for The Better-than set for ii
Focus Focus works like the poverty conceptworks like the poverty concept
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Deprivation: Axiomatic approach 2 NormalisationNormalisation
Additivity Additivity works like the independence axiomworks like the independence axiom
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Bossert-D’Ambrosio (2006)
This is just the Yitzhaki individual deprivation This is just the Yitzhaki individual deprivation index index
There is an alternative axiomatisation There is an alternative axiomatisation Ebert-Moyes (Economics Letters 2000)Ebert-Moyes (Economics Letters 2000) Different structure of reference groupDifferent structure of reference group
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Aggregate deprivation Simple approach: just sum individual deprivationSimple approach: just sum individual deprivation
Could consider an ethically weighted variantCould consider an ethically weighted variant Chakravarty and Chakraborty (1984) ChakravartyChakravarty and and MukherjeeMukherjee (1999b) (1999b)
As with poverty consider relative as well as As with poverty consider relative as well as absolute indices…absolute indices…
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Aggregate deprivation (2) An ethically weighted relative indexAn ethically weighted relative index
ChakravartyChakravarty and and MukherjeeMukherjee (1999a) (1999a)
One based on the generalised-GiniOne based on the generalised-Gini Duclos and Duclos and GrégoireGrégoire (2002) (2002)
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Overview...
Introduction
Inequality & responsibility
Deprivation
Complaints
Inequality: Advanced Topics
Reference groups and distributional judgments
•Model•Inequality results•Rankings and welfare
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The Temkin approach
Larry Temkin (1986, 1993) approach to inequalityLarry Temkin (1986, 1993) approach to inequality UnconventionalUnconventional Not based on utilitarian welfare economicsNot based on utilitarian welfare economics But not a complete “outlier” But not a complete “outlier”
Common ground with other distributional analysisCommon ground with other distributional analysis PovertyPoverty deprivationdeprivation
Contains the following elements:Contains the following elements: Concept of a complaintConcept of a complaint The idea of a reference groupThe idea of a reference group A method of aggregationA method of aggregation
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What is a “complaint?”
Individual’s relationship with the income Individual’s relationship with the income distributiondistribution
The complaint exists independentlyThe complaint exists independently does not depend on how people feeldoes not depend on how people feel does not invoke “utility” or (dis)satisfaction does not invoke “utility” or (dis)satisfaction
Requires a reference groupRequires a reference group effectively a reference incomeeffectively a reference income a variety of specifications a variety of specifications see also see also DevooghtDevooght (2003) (2003)
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Types of reference point
BOPBOP The Best-Off PersonThe Best-Off Person Possible ambiguity if there is more than onePossible ambiguity if there is more than one By extension could consider the best-off groupBy extension could consider the best-off group
AVEAVE The AVErage incomeThe AVErage income Obvious tie-in with conventional inequality measuresObvious tie-in with conventional inequality measures A conceptual difficulty for those above the mean?A conceptual difficulty for those above the mean?
ATBOATBO All Those Better OffAll Those Better Off A “conditional” reference pointA “conditional” reference point
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Aggregation
The complaint is an individual phenomenon.The complaint is an individual phenomenon. How to make the transition from this to society as How to make the transition from this to society as
a whole?a whole? Temkin makes two suggestions:Temkin makes two suggestions: Simple sumSimple sum
Just add up the complaintsJust add up the complaints Weighted sumWeighted sum
Introduce distributional weights Introduce distributional weights Then sum the weighted complaintsThen sum the weighted complaints
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The BOP Complaint Let Let rr((xx) be the first richest person you find in ) be the first richest person you find in NN.. Person Person rr (and higher) has income (and higher) has income xxnn..
For “lower” persons, natural definition of complaint:For “lower” persons, natural definition of complaint:
Similar to fundamental difference for poverty:Similar to fundamental difference for poverty:
Now we replace “Now we replace “pp” with “” with “rr””
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BOP-Complaint: Axiomatisation
Use same structural axioms as before. Plus…Use same structural axioms as before. Plus… Monotonicity: income increments reduce complaintMonotonicity: income increments reduce complaint
IndependenceIndependence
NormalisationNormalisation
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Overview...
Introduction
Inequality & responsibility
Deprivation
Complaints
Inequality: Advanced Topics
A new approach to inequality
•Model•Inequality results•Rankings and welfare
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Implications for inequality
Broadly two types of axioms with different roles.Broadly two types of axioms with different roles. Axioms on structure: Axioms on structure:
use these to determine the “shape” of the measures. use these to determine the “shape” of the measures. Transfer principles and properties of measures: Transfer principles and properties of measures:
use these to characterise ethical nature of measures use these to characterise ethical nature of measures
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A BOP-complaint class The Cowell-Ebert (SCW 2004) resultThe Cowell-Ebert (SCW 2004) result
Similarity of form to FGTSimilarity of form to FGT Characterises a family of distributions …Characterises a family of distributions …
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The transfer principle Do BOP-complaint measures satisfy the transfer Do BOP-complaint measures satisfy the transfer
principle?principle? If transfer is from richest, yesIf transfer is from richest, yes But if transfers are amongst hoi polloi, maybe not But if transfers are amongst hoi polloi, maybe not
Cowell-Ebert (SCW 2004):Cowell-Ebert (SCW 2004):
Look at some examples that satisfy thisLook at some examples that satisfy this
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Inequality contours
To examine the properties of the derived indices…To examine the properties of the derived indices… ……take the case take the case nn = 3 = 3 Draw contours of Draw contours of TT––inequality inequality
Note that both the sensitivity parameter Note that both the sensitivity parameter and the weights and the weights ww are of interest… are of interest…
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Inequality contours (=2)
w1=0.5 w2=0.5
•Now change the weights…
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Inequality contours (=2)
w1=0.75 w2=0.25
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Inequality contours (= 1)
w1=0.75 w2=0.25
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By contrast: Gini contours
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Inequality contours (= 0)
w1=0.5 w2=0.5
Again change the weights…Again change the weights…
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Inequality contours (= –1)
w1=0.75 w2=0.25
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Inequality contours (= –1)
w1=0.5 w2=0.5
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Special cases
If If then inequality just becomes the range, then inequality just becomes the range, xxnn––xx1 1
.. If If –– then inequality just becomes the “upper- then inequality just becomes the “upper-
middle class” complaint: middle class” complaint: xxnn––xxn-n-1 1 . .
If If = 1 then inequality becomes a generalised = 1 then inequality becomes a generalised absolute Gini.absolute Gini.
“triangles”“triangles”
“Y-shapes”“Y-shapes”
HexagonsHexagons
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Which is more unequal?
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
A
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
B
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Focus on one type of BOP complaint
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
A
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
B
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Orthodox approach
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
A
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
B
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T – inequality
16
17
18
19
20
21
22
-2 -1.5 -1 -0.5 0 0.5 1 1.5 2
ineq
ualit
y
A: (2,5,9,20,30)B: (2,6,9,19,30)
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The “sequence”
Temkin’s seminal contributions offer an intuitive approach Temkin’s seminal contributions offer an intuitive approach to considering changes in inequality.to considering changes in inequality.
Take a simple model of a ladder with just two rungs. Take a simple model of a ladder with just two rungs. The rungs are fixed, but the numbers on them are not.The rungs are fixed, but the numbers on them are not. Initially everyone is on the upper rung. Initially everyone is on the upper rung. Then, one by one, people are transferred to the lower rung.Then, one by one, people are transferred to the lower rung.
Start with Start with mm = 0 on lower rung = 0 on lower rung Carry on until Carry on until mm = = nn on lower rung on lower rung
What happens to inequality? What happens to inequality? Obviously zero at the two endpoints of the sequenceObviously zero at the two endpoints of the sequence But in between?But in between?
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The “sequence” (2) For the case of For the case of TT––inequality we haveinequality we have
This is increasing in This is increasing in mm if if > 0 > 0 For other cases there is a degenerate sequence in the For other cases there is a degenerate sequence in the
same directionsame direction
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Overview...
Introduction
Inequality & responsibility
Deprivation
Complaints
Inequality: Advanced Topics
A replacement for the Lorenz order?
•Model•Inequality results•Rankings and welfare
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Rankings
Move beyond simple inequality measuresMove beyond simple inequality measures The notion of complaint can also be used to generate a The notion of complaint can also be used to generate a
ranking principle that can be applied quite generally.ranking principle that can be applied quite generally. This is rather like the use of Lorenz curves to specify a This is rather like the use of Lorenz curves to specify a
Lorenz ordering that characterises inequality comparisons.Lorenz ordering that characterises inequality comparisons. Also similar to poverty rankings with arbitrary poverty Also similar to poverty rankings with arbitrary poverty
lines.lines.
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Cumulative complaints Define cumulative complaintsDefine cumulative complaints
Gives the CCC Gives the CCC cumulative-complaint contourcumulative-complaint contour Just like TIP / Poverty profileJust like TIP / Poverty profile
Use this to get a ranking Use this to get a ranking principleprinciple
i/n
r(x) / n
K(x)
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Complaint-ranking The class of BOP-complaint indicesThe class of BOP-complaint indices
Define complaint rankingDefine complaint ranking
Like the generalised-Lorenz resultLike the generalised-Lorenz result
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Social welfare again Temkin’s complaints approach to income Temkin’s complaints approach to income
distribution was to be viewed in terms of “better” distribution was to be viewed in terms of “better” or “worse”or “worse”
Not just “less” or “more” inequality. Not just “less” or “more” inequality. Can incorporate the complaint-inequality index in a Can incorporate the complaint-inequality index in a
welfare-economic framework:welfare-economic framework:
Linear approximation:Linear approximation:
Total incomeTotal incomeInequalityInequality
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Welfare contours (φ=1)
Irene’s income
Jane
t’s
inco
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Welfare contours (φ<1)
Irene’s income
Jane
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inco
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Welfare contours (φ>1)
Irene’s income
Jane
t’s
inco
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Meade’s “superegalitarianism”
Meade’s “superegalitarianism”
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The ATBO Complaint Again, a natural definition of complaint:Again, a natural definition of complaint:
Similar to fundamental difference for deprivation:Similar to fundamental difference for deprivation:
Use this complaint in the Temkin classUse this complaint in the Temkin class
Get a form similar to Chakravarty deprivationGet a form similar to Chakravarty deprivation
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Summary: complaints ““Complaints” provide a useful basis for inequality Complaints” provide a useful basis for inequality
analysis.analysis. Intuitive links with poverty and deprivation as Intuitive links with poverty and deprivation as
well as conventional inequality. well as conventional inequality. BOP extension provides an implementable BOP extension provides an implementable
inequality measure.inequality measure. CCCs provide an implementable ranking principleCCCs provide an implementable ranking principle
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References (1) Bossert, W. and C. D’Ambrosio (2006) “Reference groups and individual deprivation,”
Economics Letters, 90, 421-426 Bossert, W. and M. Fleurbaey (1996) “Redistribution and compensation,” Social Choice
and Welfare, 13, 343-355. Chakravarty, S. R. and A. B. Chakraborty (1984) “On indices of relative deprivation,”
Economics Letters, 14, 283-287 Chakravarty, S. R. and D. Mukherjee (1999a) “Measures of deprivation and their
meaning in terms of social satisfaction.” Theory and Decision 47, 89-100 Chakravarty, S. R. and D. Mukherjee (1999b) “Ranking income distributions by
deprivation orderings,” Social Indicators Research 46, 125-135.. Cowell, F. A. (1985) “The measurement of distributional change: an axiomatic
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