Arbeitspapier

Inequality Indices as Tests of Fairness

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Standard income inequality indices can be interpreted as a measure of welfare loss entailed in departures from equality of outcomes, for egalitarian social welfare functions defined on the distribution of outcomes. But such a welfare interpretation has been criticized for a long time on the grounds that these indices are snap shot outcomes-based measures which do not take into account the process generating the observed distribution. Rather than focusing on outcomes, it is argued, we should be interested in whether the underlying process is "fair." Following this line of argument, this paper develops statistical tests for fairness within well-defined income distribution generating processes and a well specified notion of fairness. We find that the likelihood ratio (LR) test for fairness versus unfairness within two such processes are proportional to Theil's first and second inequality indices respectively. The LR values may either be used as a test statistic or to approximate a Bayes factor that measures the posterior probabilities of the fair version of the processes over that of the unfair. The answer to the process versus outcomes critique is thus not to stop calculating inequality measures, but to interpret their values differently to compare them to critical values for a test of the null hypothesis of fairness, or to use them directly as a measure of the chance that the process was fair relative to the chance it was unfair. We also apply this perspective to measurement of "inequality of opportunity."

Language
Englisch

Bibliographic citation
Series: IZA Discussion Papers ; No. 10721

Classification
Wirtschaft
General Economics: General
Relation of Economics to Social Values
Econometrics
Hypothesis Testing: General
Equity, Justice, Inequality, and Other Normative Criteria and Measurement
Subject
snapshot inequality indices
process versus outcomes
fair versus unfair process
likelihood ratio tests of fairness
Bayes Factor

Event
Geistige Schöpfung
(who)
Kanbur, Ravi
Snell, Andy
Event
Veröffentlichung
(who)
Institute of Labor Economics (IZA)
(where)
Bonn
(when)
2017

Handle
Last update
10.03.2025, 11:43 AM CET

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Object type

  • Arbeitspapier

Associated

  • Kanbur, Ravi
  • Snell, Andy
  • Institute of Labor Economics (IZA)

Time of origin

  • 2017

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