W. James Smith

Lorenz Dominance and Welfare: Changes in the U.S. Distribution of Income, 1967-1986

This paper examines income inequality in the Untied States over the period 1967-86 using recently developed tests for differences in Lorenz curves. The authors are able to rank eighteen of nineteen annual comparisons. In contrast, standard techniques are able to rank only twelve. These results suggest that the Lorenz dominance principle is more empirically relevant than previously thought. The tests reveal a sharp rise in U.S. inequality between 1978 and 1982, as well as a shift toward greater inequality over the entire period. The authors also examine changes in economic welfare using the joint mean-Lorenz dominance principle. Copyright 1991 by MIT Press.

Mobility measurement,transition matrices and statistical inference

This paper develops statistical inference procedures for testing income mobility with transition matrices. Both summary mobility measures and partial mobility orderings are considered. We first examine the different ways that transition matrices are constructed in the literature on mobility measurement. Different approaches lead not only to distinct interpretations of mobility but also to different sampling distributions. The large sample properties of the estimates of transition matrices allow us to derive testing procedures for both summary mobility measures and partial orders of mobility across income regimes. The tests are illustrated by applying them to income mobility in the U.S. and Germany using the Panel Study of Income Dynamics and German Socio-Economic Panel data.

Envy, malice and Pareto efficiency: An experimental examination

Abstract Economists have long speculated that envy and malice play important roles in economic decisions. Surprisingly little empirical evidence has been offered in support of such claims. This paper uses experimental and multinomial logit techniques to estimate the effects of envy and malice in economic decisions involving Pareto efficiency. Envy and malice turn out to be powerful motivations with strong differential impacts across countries and relative positions. In some cases, opposition to Pareto gains reaches 60%. Behind a veil of ignorance, however, opposition falls to 10% overall. Pareto efficiency thus garners its greatest support under conditions which can lay claim to greatest legitimacy, those free of situational and personal bias.“... the greater part of human actions have their origin not in logical reasoning but in sentiment. This is particularly true for actions that are not motivated economically.... Man, although impelled to act by nonlogical motives, likes to tie his actions logically to certain principles; he therefore invents these a posteriori in order to justify his actions.”V. Pareto in The rise and fall of the elites (1968, p. 27)

International Comparisons of Income Inequality: Tests for Lorenz Dominance across Nine Countries

This paper examines income inequality across nine countries using the Luxembourg Income Study data set. New statistical tests and comparability of data provide an exceptionally clear picture of relative income inequality. Only 4 comparisons out of a possible 108 cannot be ranked. In most cases, differences in the definition of the recipient unit make little difference in the rankings. Irrespective of recipient units, Sweden, Norway, and Germany come out at the top of the ordinal Lorenz ranking, with Australia, Canada, and the United Kingdom in the middle, and the United States and Switzerland at the bottom. Copyright 1991 by The London School of Economics and Political Science.

A Comparison of Two New Measures of Tax Progressivity [Measurement of Tax Progressivity: An International Comparison]. [Measurement of Tax Progressivity]

Recently N. C. Kakwani (I977) and Daniel Suits (I977) independently and simultaneously developed new measures of the degree of tax progression. Both measures are related to the Gini ratio of income inequality and are distinct from conventional elasticity measures of progressivity in that each yields a summary statistic, while standard elasticity measures of progressivity vary as the tax base changes. In this paper we briefly describe the measures, identify their important characteristics, and establish the analytical relation between them. Empirical calculations of the progressivity of the U.S. income tax system for the period I 962-76 reveal that the two measures display different magnitudes of change in progressivity. More importantly, in three out of fourteen years the measures moved in opposite directions.

The coefficient of variation, stochastic dominance and inequality: A new interpretation

Abstract There exists a close tie between the coefficient of variation (CV) and a recently proposed inequality ranking criterion. We show that 1 2 (CV)2 is the area between the second-degree normalized stochastic curve and the line of perfect equality.

International Comparisons of Welfare and Poverty: Dominance Orderings for Ten Countries

Inference-based stochastic dominance procedures are applied to Luxembourg Income Study data to rank ten western countries in terms of standards of living and poverty. First-order dominance comparisons ranks more than 50 percent of all pairwise comparisons and second-order (generalized Lorenz) dominance adds another 25 percent. Truncated dominance analysis is used to make inferences about poverty and up to 98 percent of the truncated distributions are ordered. The results differ substantially from those obtained when only relative incomes and inequality are considered.

Incomplete information, income redistribution and risk averse median voter behavior

This paper extends the median voter model to include risk aversion. An expected utility maximizing median voter with an aversion to risk may behave differently than a median voter who is certain. A referendum on income redistribution from the top of the distribution to the bottom which fails when the median voter is certain may pass in the extended median voter model. Economic inefficiencies and the net losses accompanying redistribution are shown to play a pivotal role in determining the behavior of the risk averse median voter. The model is illustrated using a one percent Demogrant redistribution.The major motive for government income transfers in the modern world, and in fact throughout history, is simply that the recipients of the money would like to get it and they have the political power ... to implement their desires.Gordon Tullock (1983: 2)Because political transfers seem to violate the standard Pareto norms, we have tended to opt out of any discussion and to say that nothing further can be constructed on the basis of individual evaluations. Once the franchise has been extended to all adults, and once the constitution has allowed income transfers to take place collectively, the formal act of transfer becomes fully predictable from positive economic analysis. The basic property right inheres in the voting franchise ...James M. Buchanan (1984: 187)

The Average Tax Burden and the Welfare Implications of Global Tax Progressivity

The measurement of global tax progressivity has been extensively debated over the last decade. We find that the debate stems from a failure to fully recognize the role of the average tax burden. We demonstrate that, once the effect of the average tax burden is controlled for, the two major approaches to global progressivity measurement, which have been long thought to be fundamentally different, must rank tax systems the same way. We show that valid welfare inferences can be drawn from global progressivity comparisons only under these same conditions.

Inequality Orderings, Normalized Stochastic Dominance, and Statistical Inference

This article derives large-sample properties and provides asymptotically distribution-free statistical inference procedures for an alternative approach to inequality orderings—normalized stochastic dominance (NSD). NSD is a straightforward extension of standard dominance techniques. As such, it can be generalized to higher orders of dominance, thereby providing a more powerful technique for ranking distributions. We illustrate the NSD method by applying it to Current Population Survey data for 1970–1990.