Scandinavian Working Papers in Economics

Working Papers in Economics,
University of Gothenburg, Department of Economics

No 707: ‘Fair’ Welfare Comparisons with Heterogeneous Tastes: Subjective versus Revealed Preferences

Alpaslan Akay (), Olivier B. Bargain () and Xavier Jara
Additional contact information
Alpaslan Akay: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: P.O.Box 640, SE 40530 GÖTEBORG, Sweden
Olivier B. Bargain: Aix-Marseille University
Xavier Jara: University of Essex and ISER

Abstract: 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 makesa 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 different 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 explained 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.

Keywords: fair allocation; money metric; decision utility; experienc edutility; labor supply; subjective well-being

JEL-codes: C35; C90; D60; D63; D71; H24; H31; J22

707 pages, September 2017

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