Dominance criteria for welfare comparisons: using equivalent income to describe differences in needs

The article demonstrates that the dominance approach—often used for the measurement of welfare in a population in which there are different household types (see e.g., Atkinson and Bourguignon, Arrow and the foundations of the theory of economic policy, 350–370, 1987)—can be based on explicit value judgments on the households’ living standard. We define living standard by equivalent income (functions) and consider classes of inequality averse social welfare functions: Welfare increases if the inequality of living standard is decreased. In this framework, we suggest three new dominance criteria and obtain characterizations of second degree stochastic dominance and of two criteria proposed by Bourguignon (Journal of Econometrics 42:67–80, 1989).