Guiding policymakers in choices that affect income inequality

Policymakers frequently face policy options that have different impacts on the income distribution among the individuals in a society. Different rankings of income distributions imply different degrees of inequality aversion. For example, a ranking by GDP per capita implies no inequality aversion, because it ranks income distributions only based on average income and not based on dispersion. On the other extreme, measures like the Gini index are highly inequality-averse, because they measure only the dispersion of income and do not take into account the levels of income. Generally, different ways of ranking income distributions imply different degrees of aversion to income inequality. Determining the socially desired degree of inequality aversion is important for the purposes of policy evaluation and design. The project leader recently developed a theoretical framework that determines a unique social ranking of income distributions based on the two axioms of unanimity (if everyone supports a certain change in income or prices, then that change is socially desirable) and income anonymity (each person’s income matters equally for assessing the social desirability of an income distribution). The new project will build on this framework to estimate social rankings based on consumer expenditure patterns. It will use consumer expenditure surveys from a variety of countries to estimate country-specific levels of inequality aversion implied by this ranking. The goal is to translate theoretical results into pragmatic guidelines for policymakers that can be readily used for the purpose of assessing tradeoffs that involve changes in income inequality.