The Fundamental Properties, Stability and Predictive Power of Distributional Preferences

Arbeitspapier

Parsimony is a desirable feature of economic models but almost all human behaviors are characterized by vast individual variation that appears to defy parsimony. How much parsimony do we need to give up to capture the fundamental aspects of a population's distributional preferences and to maintain high predictive ability? Using a Bayesian nonparametric clustering method that makes the trade-off between parsimony and descriptive accuracy explicit, we show that three preference types - an inequality averse, an altruistic and a predominantly selfish type - capture the essence of behavioral heterogeneity. These types independently emerge in four different data sets and are strikingly stable over time. They predict out-of-sample behavior equally well as a model that permits all individuals to differ and substantially better than a representative agent model and a state-of-the-art machine learning algorithm. Thus, a parsimonious model with three stable types captures key characteristics of distributional preferences and has excellent predictive power.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IZA Discussion Papers ; No. 16535

Classification and Topics

• Classification: Wirtschaft ; Personal Income, Wealth, and Their Distributions ; Equity, Justice, Inequality, and Other Normative Criteria and Measurement ; Econometric and Statistical Methods: Special Topics: Other ; Design of Experiments: General
• Subject: distributional preferences ; altruism ; inequality aversion ; preference heterogeneity ; stability ; out-of-sample prediction ; parsimony ; Bayesian nonparametrics

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Fehr, Ernst ; Epper, Thomas ; Senn, Julien
• Event: Veröffentlichung
• (who): Institute of Labor Economics (IZA)
• (where): Bonn
• (when): 2023

Further information

• Handle: http://hdl.handle.net/10419/282662
• Last update: 10.03.2025, 11:41 AM CET