Should We Like it? - A Social Welfare Based Quantification of Policy Attractiveness

Voelzke Jan, Goessling Fabian

Zusammenfassung
Inequality has again become prominent in public and scientific dis-cussion. There is a vast literature on its measurement, and numerous empiri-cal papers describe and compare the situation in different countries. However,these results can barely be used to evaluate (potential) policy decisions thatchange the underlying state variables such as income or wealth. A classic ap-proach for such evaluation uses social welfare functions, but the research in thisfield often only provides conceptional procedures which are not appropriate forempirical comparative studies.In this paper, we propose a new tool that measures the attractiveness ofa policy decision, based on a social welfare function. The so-calledsubstantialwelfare ratio, is motivated by the literature on performance measurement andincorporates an inherent robustness check. In particular, it investigates theimpact of small modifications at the tails of the distribution. Additionally, itmeets several criteria for good inequality and performance measures, makingdecisions based on the ratio consistent with those based on such measures. Weprovide an application to European data, for which we adopt a stylized life-cycle model, in order to motivate the shape of the underlying welfare function.The example shows that the new tool can be used to analyse policy decisionssuch as tax-reforms and thereby reveals differences in the attractiveness andwelfare structure of selected subgroups of the underlying population.