Abstract
We investigate the third-degree stochastic dominance order, which is receiving increasing attention in the field of inequality measurement. Observing that this partial order fails to satisfy the von Neumann–Morgenstern independence property in the space of random variables, we introduce the concepts of strong and local third-degree stochastic dominance, which do not suffer from this deficiency. We motivate these two new binary relations and characterize them in the spirit of the Lorenz characterization of the second-degree stochastic order, comparing our findings with the closest results in inequality literature.
Similar content being viewed by others
References
Aaberge, R.: Characterizations of Lorenz curves and income distributions. Soc. Choice Welf. 17, 639–653 (2000)
Atkinson, A.B.: More on the Measurement of Inequality. Mimeo (1973)
Baucells, M., Shapley, L.S.: Multiperson Utility. Mimeo, UCLA (1998)
Chateauneuf, A., Gajdos, T., Wilthien, P.H.: The principle of strong diminishing transfers. J. Econ. Theory 103, 311–333 (2002)
Chew, S.H.: A generalization of the quasilinear mean with applications to the measurement of income inequality and decision theory resolving the Allais paradox. Econometrica 51, 1065–1092 (1983)
Chiu, W.H.: Intersecting Lorenz curves, the degree of downside inequality aversion, and tax reforms. Soc. Choice Welf. 28, 375–399 (2007)
Davies, J.B., Hoy, M.: The normative significance of using third-degree stochatic dominance in comparing income distributions. J. Econ. Theory 64, 520–530 (1994)
Davies, J.B., Hoy, M.: Making inequality comparisons when Lorenz curves intersect. Am. Econ. Rev. 85, 980–986 (1995)
Davies, J.B., Hoy, M.: Flat rate taxes and inequality measurement. J. Public Econ. 84, 33–46 (2002)
Dekel, E.: An axiomatic characterization of preferences under uncertainty: weakening the independence axiom. J. Econ. Theory 40, 304–318 (1986)
Dubra, J., Maccheroni, F., Ok, E.A.: Expected utility theory without the completeness axiom. J. Econ. Theory 115, 118–133 (2004)
Feldstein, M.S.: On the theory of tax reform. J. Public Econ. 6, 77–104 (1976)
Fishburn, P., Vickson, R.G.: Theoretical foundations of stochastic dominance. In: Withmore, G., Findlay, M. (eds.) Stochastic Dominance, pp. 39–113. Lexington Books, London (1978)
Gajdos, T.: Single crossing Lorenz curves and inequality comparisons. Math. Soc. Sci. 47, 21–36 (2004)
Guesnerie, R.: On the direction of tax reform. J. Public Econ. 7, 179–202 (1977)
Hardy, G.H., Littlewood, J.E., Polya, G.: Inequalities. Cambridge University Press, Cambridge (1934)
Iochum, B.: Cônes Autopolaires et Algèbres de Jordan. Lecture Notes in Mathematics N° 1049. Springer Verlag, New York (1984)
Kolm, S.C.: Unequal inequalities II. J. Econ. Theory 13, 82–111 (1976)
Le Breton, M.: Essais sur les Fondements de l’Analyse Economique de l’Inégalité, Thèse de Doctorat d’Etat, Université de Rennes (1986)
Le Breton, M.: Stochastic dominance: a bibliographical rectification and a restatement of Whitmore’s theorem. Math. Soc. Sci. 13, 73–79 (1987)
Marshall, A.W., Olkin, I.: Inequalities: Theory of Majorization and Its Applications. Academic Press, London (1979)
Muliere, P., Scarsini, M.: A note on stochastic dominance and inequality measures. J. Econ. Theory 49, 314–323 (1989)
Shorrocks, A., Foster, J.E.: Transfer sensitive inequality measures. Rev. Econ. Stud. 54, 485–497 (1987)
Trannoy, A., Lugand, C.: L’Evolution de l’Inégalité des Salaires dues aux Différences de Qualifications: Une Etude d’Entreprises Françaises de 1976 à 1987. Economie et Prévision 102–103, 205–220 (1992)
Weymark, J.A.: Undominated directions of tax reform. J. Public Econ. 16, 343–369 (1981a)
Weymark, J.A.: Generalized Gini inequality indices. Math. Soc. Sci. 1, 409–430 (1981b)
Yaari, M.: A controversial proposal concerning inequality measurement. J. Econ. Theory 44, 381–397 (1988)
Zoli, C.: Intersecting generalized Lorenz curves and the Gini index: Soc. Choice Welf. 16, 183–196 (1999)
Zoli, C.: Inverse stochastic dominance, inequality measurement and Gini indices. In: Moyes, P., Seidl, C., Shorrocks, A.F. (eds.) Inequalities: Theory, Measurement and Applications, pp. 119–161, Journal of Economics, Supplement 9 (2002)
Author information
Authors and Affiliations
Corresponding author
Additional information
A preliminary version of this paper was presented at the second Canazei Winter School on Inequality and Collective Welfare Theory (IT2). We would like to thank all participants for their comments and suggestions. We are especially grateful to Rolf Aaberge, Peter Lambert, Maria G. Monti, Ernesto Savaglio, John Weymark, Claudio Zoli and two anonymous referees who provided very detailed and insightful comments.
Rights and permissions
About this article
Cite this article
Le Breton, M., Peluso, E. Third-degree stochastic dominance and inequality measurement. J Econ Inequal 7, 249–268 (2009). https://doi.org/10.1007/s10888-008-9077-0
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10888-008-9077-0