The Normative Significance of Using Third-Degree Stochastic Dominance in Comparing Income Distributions

Abstract Third-degree stochastic dominance (TSD) has been promoted as a normative criterion to refine the partial ordering over income distributions induced by second-degree stochastic dominance (i.e., the Lorenz criterion). This paper enhances our understanding of the normative properties of TSD. By defining a "Rawlsian composite transfer" to be a progressive transfer combined with a regressive transfer, with the former taking place in a lower income region, we show how TSD is a "Rawlsian extension" of the Lorenz criterion. We also show how this property is affected by changes in the original vector of incomes. Journal of Economic Literature Classification Number: D63.