The welfare function of income in Belgium: An empirical investigation

Abstract

This paper is an empirical investigation into the validity of some theses posed in [5]. There it is stated (1) that the individual is able to evaluate his income level on a zero-one scale in a cardinal way, and (2) that the resulting evaluation U(y) of a steady income stream at level y under specific assumptions is approximately equal to λ (y; μ, σ2), where λ is a lognormal distribution function with parameters μ, σ2.In this paper these statements are empirically investigated on the basis of a consumer survey conducted by the Belgian Consumer Union. Moreover, approximate relationships between the values of μ, σ2 and several variables, such as income, family size, age, job, stability of income, etc., have been derived.It turns out that σ2 is an individual constant, but that μ can be explained for a considerable part by the variables family size and income level. Most notable is the dependence of the individual's welfare evaluation on income, a phenomenon that is called “ preference drift.” It might lead to major changes in parts of the existing economic theory on consumer behavior and social welfare.