Ranking Income Distributions: The Tradeoff between Efficiency and Equality

Abstract

Shorrocks suggested a broad welfare dominance relationship using the properties of PigouDalton and Pareto to provide a partial ranking of income distributions. This paper considers a family of alternative dominance relationships generalizing Shorrocks's approach. The Pareto property, which states that welfare will not diminish if the income of any individual increases, holding other incomes constant, is replaced by the property that welfare will not diminish if the growth in income is shared by all the poorer sectors of the society. Implications of these alternatives are explored. Using data from the People's Republic of China, we show how the family of dominance relationships proposed in this paper can be used to examine real-world welfare changes.