On the measurement of well-being with reference consumption

Working Paper 2022-629

Abstract

We axiomatically study how to measure well-being when individuals have heterogeneous preferences and consumption bundles are evaluated by comparison with some reference bundle (a poverty line bundle, an index of needs, the average consumption in a reference group, etc.). If only the reference bundle matters, Deaton (1979)’s distance function turns out to be the only measure satisfying basic axioms. If the measure is allowed to depend on preferences at the reference, we resort to the lattice structure of the set of indifference contours. We require, for instance, that well-being measured at the supremum (resp. infimum) of two indifference contours be equal to the maximum (resp. minimum) of their corresponding well-being levels, for constant indifference contour at the reference. We find these axioms to have different implications depending on the preference domain and we characterize well-being measures that satisfy all possible combinations of these axioms. One prominent measure computes the ratio between equivalent income at consumption and at reference, with prices being chosen to maximize well-being.

Authors: Domenico Moramarco, François Maniquet.