Scandinavian Working Papers in Economics

Memorandum,
Oslo University, Department of Economics

No 20/2014: A Theory for Ranking Distribution Functions

Rolf Aaberge , Tarjei Havnes () and Magne Mogstad
Additional contact information
Rolf Aaberge: Statistics Norway
Tarjei Havnes: Dept. of Economics, University of Oslo, Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Magne Mogstad: University of Chicago and Statistics Norway

Abstract: We propose a general framework to unambiguously compare distributions functions in an economically interpretable way. Our framework provides complete ranking of any set of distributions and money metric interpretation of the social welfare level of a dominating distribution as compared to a dominated distribution. We show the usefulness of our framework using two empirical applications; the first assesses the welfare implications of changes in household income distributions over the business cycle, while the second performs a social welfare comparison of the actual and counterfactual outcome distributions from a policy experiment.

Keywords: distribution functions; stochastic dominance; social welfare; inequality

JEL-codes: D30; D63; I31

49 pages, September 30, 2014

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