The atlas of inequality aversion: theory and empirical evidence on 55 countries from the Luxembourg Income Study database

Abstract

Research background: In the distributive analysis, the constant relative inequality aversion utility function is a standard tool for ethical judgements of income distributions. The sole parameter ? of this function expresses a society?s aversion to inequality. However, the profession has not committed to the range of ?. When assessing inequality and other welfare characteristics, analysts assume an arbitrary level of ?, common to all countries and years. This assumption seems unjustified.

Purpose of the article: This paper aims to estimate the parameter ? for each country and year individually using datasets from the Luxembourg Income Study Database in all available years, which dates back to the 1970s.

Methods: We utilise the method of estimating ?, which assumes the generalised beta of the second kind distribution of incomes. The estimator of ? is derived from the mathematical condition of the existence of the social welfare function. 

Findings & value added: We have elaborated an ?atlas? of  388 estimates of ? for 55 countries across time. Inequality aversion is country-year specific, with a minimum of 0.97 and a maximum of 3.8. Ninety per cent of all estimates are less than 2.5. Inequality aversion is negatively correlated with income inequality, but it is independent of economic development. Thus, inequality aversion appears as an additional dimension of the classical inequality-development relationship. This article contributes to solving a fundamental problem of Welfare Economics: directly measuring the social utility of income (welfare) function. The estimates of ? for 55 countries imply a complete knowledge of these countries' constant relative inequality aversion utility functions.

Keywords

inequality aversion, Atkinson Index, income distribution, inequality, utility function

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