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‘Fair’ Welfare Comparisons with Heterogeneous Tastes: Subjective versus Revealed Preferences

Working paper
Authors Alpaslan Akay
Olivier B. Bargain
H. Xavier Jara
Publisher University of Gothenburg
Place of publication Gothenburg
Publication year 2017
Published at Department of Economics
Language en
Links hdl.handle.net/2077/53738
Keywords fair allocation, money metric, decision utility, experienced utility, labor supply, subjective well-being
Subject categories Economics

Abstract

Multidimensional welfare analysis has recently been revived by money-metric measures based on explicit fairness principles and the respect of individual preferences. To opera- tionalize this approach, preference heterogeneity can be inferred from the observation of individual choices (revealed preferences) or from self-declared satisfaction following these choices (subjective well-being). We question whether using one or the other method makes a di¤erence for welfare analysis based on income-leisure preferences. We estimate ordinal preferences that are either consistent with actual labor supply decisions or with income- leisure satisfaction. For di¤erent ethical priors regarding work preferences, we compare the welfare rankings obtained with both methods. The correlation in welfare ranks is high in general and very high for the 60% of the population whose actual choices coincide with subjective well-being maximization. For the rest, most of the discrepancies seem to be ex- plained by labor market constraints among the low skilled and underemployment among low-educated single mothers. Importantly from a Rawlsian perspective, the identification of the worst off depends on ethical views regarding responsibility for work preferences and the extent to which actual choices are constrained on the labor market.

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