`Fair’ Welfare Comparisons with Heterogeneous Preferences: Subjective Satisfaction versus Revealed Preferences

Bargain, Olivier (2016). '`Fair' Welfare Comparisons with Heterogeneous Preferences: Subjective Satisfaction versus Revealed Preferences' Paper presented at the annual conference of the HDCA, Tokyo 2016.


abstract
Recent research has attempted to operationalize welfare analysis based on some fairness principles while respecting individual preference heterogeneity (see the egalitarian equivalence criterion in Fleurbaey, 2008). These studies have indifferently used revealed preferences (for instance Decoster and Haan, 2015, Bargain et al., 2013) or subjective well-being (Decancq et al., 2013) in their empirical applications. The present study questions whether using one or the other approach for "fair" welfare analysis makes a difference. We focus on income-leisure preferences, a particularly important domain due to its intimate connection with redistributive policies. We estimate the underlying ordinal preferences from labor supply choice on the one hand, and income-leisure subjective satisfaction on the other, using the same panel of British households. Under different normative cardinal criteria, we compare (equivalent income) welfare rankings based on satisfaction or choices, as well as the characteristics of the worst-off in both cases. We find that the correlation in welfare ranks between approaches depends crucially on the way we derive preference heterogeneity. 

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