Lorenz non-consistent welfare and inequality measurement

Typical welfare and inequality measures are required to be Lorenz consistent which guarantees that inequality decreases and welfare increases as a result of a progressive transfer. We explore the implications for welfare and inequality measurement of substituting the weaker absolute differentials and deprivation quasi-orderings for the Lorenz quasi-ordering. Restricting attention to distributions of equal means, we show that the utilitarian model - the so-called expected utility model in the theory of risk - does not permit one to make a distinction between the views embedded in the differentials, deprivation and Lorenz quasi-orderings. In contrast it is possible within the dual model of M. Yaari (Econometrica <Emphasis Type="Bold">55 (1987), 99–115) to derive the restrictions to be placed on the weighting function which guarantee that the corresponding welfare orderings are consistent with the differentials and deprivation quasi-orderings respectively. Finally we drop the equal mean condition and indicate the implications of our approach for the absolute ethical inequality indices. Copyright Kluwer Academic Publishers 2005