‘Fair’ welfare comparisons with heterogeneous tastes: subjective versus revealed preferences

Multidimensional welfare analysis has recently been revived by money-metric measures based on explicit fairness principles and the respect of individual preferences. To operationalize 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 difference 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 ethical priors based on the compensation principle, we compare the welfare rankings obtained with both methods. The correlation in welfare ranks is high in general and reranking is insignificant for 77% of the individuals. The remaining discrepancies possibly pertain to a variety of factors including constraints (health issues, labor market rationing), irrational behavior and alternative life choices to the pursuit of well-being. We discuss the implications of using one or the other preference elicitation method for welfare analysis.

[1]  E. Schokkaert,et al.  Behavioral welfare economics and redistribution , 2012 .

[2]  Paul Frijters,et al.  The Anatomy of Subjective Well-Being , 2001 .

[3]  Costas Meghir,et al.  Estimating labour supply responses using tax reforms , 1995 .

[4]  A Samuelsonian Validation Test for Happiness Data , 2015 .

[5]  A. Clark,et al.  Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other Puzzles , 2007 .

[6]  X. Gong,et al.  A Structual Labour Supply Model with Nonparametric Preferences , 2000, SSRN Electronic Journal.

[7]  Alois Stutzer,et al.  Stress that Doesn't Pay: The Commuting Paradox , 2008 .

[8]  Laurence Jacquet,et al.  A Comparison of Optimal Tax Policies When Compensation or Responsibility Matter , 2009, SSRN Electronic Journal.

[9]  P. Haan,et al.  Empirical welfare analysis with preference heterogeneity , 2013 .

[10]  D. Kahneman,et al.  Back to Bentham? Explorations of experience utility , 1997 .

[11]  M. Lokshin,et al.  Identifying Welfare Effects from Subjective Questions , 1999 .

[12]  P. Frijters,et al.  How Important is Methodology for the Estimates of the Determinants of Happiness? , 2004 .

[13]  Miles S. Kimball,et al.  Can Marginal Rates of Substitution Be Inferred from Happiness Data? Evidence from Residency Choices , 2013, The American economic review.

[14]  M. Fleurbaey,et al.  Beyond GDP: Measuring Welfare and Assessing Sustainability , 2013 .

[15]  Tarja K. Viitanen.  Cost of Childcare and Female Employment in the UK , 2005 .

[16]  C. Boyce.  Understanding fixed effects in human well-being , 2010 .

[17]  G. Loewenstein,et al.  Projection Bias in Predicting Future Utility , 2000 .

[18]  Do People Seek to Maximize Their Subjective Well�?Being? , 2015 .

[19]  M. Fleurbaey,et al.  A Theory of Fairness and Social Welfare , 2011 .

[20]  P. Chiappori,et al.  Non-Unitary Models of Household Behavior: A Survey of the Literature , 2009, SSRN Electronic Journal.

[21]  François Maniquet,et al.  Help the Low Skilled or Let the Hardworking Thrive? A Study of Fairness in Optimal Income Taxation , 2006 .

[22]  Marc Fleurbaey,et al.  Social Welfare, Priority to the Worst-Off And the Dimensions of Individual Well-Being , 2006 .

[23]  Alpaslan Akay,et al.  Back to Bentham, Should We? Large-Scale Comparison of Experienced Versus Decision Utility , 2017, SSRN Electronic Journal.

[24]  Marc Fleurbaey,et al.  Beyond GDP: The Quest for a Measure of Social Welfare , 2009 .

[25]  John E. Roemer,et al.  Equality of opportunity: A progress report , 2002, Soc. Choice Welf..

[26]  Erwin Ooghe,et al.  Who's Afraid of Aggregating Money Metrics? , 2016 .

[27]  Erik Schokkaert,et al.  Responsibility sensitive egalitarianism and optimal linear income taxation , 2004, Math. Soc. Sci..

[28]  Costas Meghir,et al.  The labour market impact of the working families’ tax credit , 2000 .

[29]  Raj Chetty.  Bounds on Elasticities with Optimization Frictions: A Synthesis of Micro and Macro Evidence on Labor Supply , 2009 .

[30]  E. Schokkaert,et al.  Putting measures of individual well-being to use for ex-ante policy evaluation , 2017 .

[31]  D. Kahneman,et al.  Would You Be Happier If You Were Richer? A Focusing Illusion , 2006, Science.

[32]  Hans G. Bloemen.  Collective Labour Supply, Taxes, and Intrahousehold Allocation: An Empirical Approach , 2015, SSRN Electronic Journal.

[33]  Jeremy Lise,et al.  Consumption Inequality and Intra-Household Allocations , 2004 .

[34]  François Maniquet,et al.  Optimal taxation theory and principles of fairness , 2015 .

[35]  Charles Blackorby,et al.  Money metric utility: A harmless normalization? , 1988 .

[36]  Dirk Neumann,et al.  Welfare, labor supply and heterogeneous preferences: evidence for Europe and the US , 2013, Soc. Choice Welf..

[37]  O. Bargain.  Back to the future - decomposition analysis of distributive policies using behavioural simulations , 2010 .

[38]  E. Schokkaert,et al.  This item is the archived peer-reviewed author-version of: Happiness, equivalent incomes and respect for individual preferences , 2022 .

[39]  W. Pohlmeier,et al.  Female Labor Force Participation and the Big Five , 2010 .

[40]  François Maniquet,et al.  Fair Income Tax , 2006 .

[41]  J. Stiglitz,et al.  Report by the commission on the measurement of economic performance and social progress , 2011 .

[42]  X. Gong,et al.  A structural labour supply model with flexible preferences , 2002 .

[43]  John K. Dagsvik,et al.  Sectoral labour supply, choice restrictions and functional form , 2006 .

[44]  Yew-Kwang Ng.  A Case For Happiness, Cardinalism, and Interpersonal Comparability , 1997 .

[45]  Elisha A. Pazner,et al.  Egalitarian Equivalent Allocations: A New Concept of Economic Equity , 1978 .

[46]  The Economics of Workaholism: We Should Not Have Worked on This Paper , 2008 .

[47]  P. Haan,et al.  Intertemporal labor supply and involuntary unemployment , 2007 .

[48]  Erik Schokkaert,et al.  Inequality, income and well-being , 2014 .

[49]  Barbara Petrongolo.  Gender Segregation in Employment Contracts , 2004 .

[50]  John H. Pencavel.  Constant-Utility Index Numbers of Real Wages , 1977 .

[51]  A. Oswald,et al.  Unhappiness and Unemployment , 1994 .

[52]  Nichole Szembrot,et al.  Beyond Happiness and Satisfaction: Toward Well-Being Indices Based on Stated Preference , 2012, The American economic review.

[53]  A. Sen,et al.  Commodities and Capabilities , 1987 .

[54]  T. Kitagawa,et al.  Measurement error and rank correlations , 2018 .

[55]  M. Fleurbaey.  Fairness, responsibility, and welfare , 2008 .

[56]  Dirk Neumann,et al.  Does the Choice of Well-Being Measure Matter Empirically? An Illustration with German Data , 2014, SSRN Electronic Journal.

[57]  A. Peichl,et al.  Accounting for Labor Demand Effects in Structural Labor Supply Models , 2010, SSRN Electronic Journal.

[58]  P. Frijters.  Do individuals try to maximize general satisfaction , 2000 .

[59]  Alex Rees-Jones,et al.  What Do You Think Would Make You Happier? What Do You Think You Would Choose? , 2011, The American economic review.

[60]  Erwin Ooghe,et al.  Fair and Efficient Taxation Under Partial Control: Theory and Evidence , 2010, SSRN Electronic Journal.

[61]  William Thomson.  Notions of equal, or equivalent, opportunities , 1994 .

[62]  A. Peichl,et al.  Comparing Labor Supply Elasticities in Europe and the United States: New Results , 2014 .

[63]  Erwin Ooghe,et al.  Is it Fair to Make Work Pay? , 2007 .

[64]  E. Schokkaert,et al.  Preferences and subjective satisfaction: measuring well-being on the job for policy evaluation , 2011 .

[65]  G. Dekkers,et al.  Estimating and simulating with a random utility – random opportunity model of job choice , 2015 .

[66]  A. Stutzer,et al.  (Mis-)Predicted Subjective Well-Being Following Life Events , 2015, SSRN Electronic Journal.

[67]  Costas Meghir,et al.  Estimating Labor Supply Responses Using Tax Reforms , 2007 .

[68]  W. Thomson.  Fair Allocation Rules , 2011 .

[69]  B. Bernheim,et al.  Beyond Revealed Preference: Choice Theoretic Foundations for Behavioral Welfare Economics , 2008 .

[70]  John P. Haisken-DeNew,et al.  How Well Do Individuals Predict Their Future Life Satisfaction? Evidence from Panel Data Following a Nationwide Exogenous Shock , 2002 .

[71]  A. Clark,et al.  When Experienced and Decision Utility Concur: The Case of Income Comparisons , 2017 .

[72]  R. Blundell,et al.  Labour supply and taxation with restricted choices , 2014, Journal of Econometrics.

[73]  Vignette Equivalence and Response Consistency: The Case of Job Satisfaction , 2011 .

[74]  E. Glaeser,et al.  Unhappy Cities , 2014, Journal of Labor Economics.

[75]  Arthur van Soest,et al.  Structural models of family labor supply: a discrete choice approach. , 1995 .

[76]  Claudia Senik.  Income Distribution and Well-Being: What Can We Learn from Subjective Data? , 2005 .

[77]  Jean-François Carpantier,et al.  Empirical welfare analysis: when preferences matter , 2016, Soc. Choice Welf..