The MEqIn Project
Detailed project description
There seems to be a consensus among economists, social scientists and policy makers that well-being is multidimensional, so that any social policy, such as policies aiming at reducing poverty, should be designed and evaluated based on their implications on the many dimensions of well-being, such as labor force participation, material consumption, health, housing conditions, etc.
The corner stone of the project is a new measure of individual well-being that has recently been introduced in the economic literature and that is rapidly gaining popularity (Fleurbaey and Maniquet, 2011; Fleurbaey and Blanchet, 2013). This measure is grounded on the notion of equivalent income. It has three key characteristics. First, it takes account of both external (e. g., consumption of private goods) and internal (e. g., health) dimensions of the well-being of individuals. Second, it offers a promising compromise between the traditional objective approaches to well-being, which are known to fail to take the point of view of the people themselves sufficiently well into account, and subjective approaches to well-being, which are known to fail to account for the differences in the amounts of resources that are necessary to help different individuals reach the same subjective satisfaction level. Equivalent incomes, on the contrary, measure the value that different people assign to the quantities of external and internal resources they have access to. Third, equivalent incomes can be measured at the personal level, dropping the assumption of an even distribution of well-being within the household, consistently with newly developed collective theories of household decision making.
The objective of our proposal was to set up a data set of a representative sample of Belgian households. The data set was constructed in such a way that the three techniques of estimating preferences can be compared, with the objective of finding the way to mix them to reach the best possible estimates. No such data set exists, neither for Belgium no for any other country. Once preferences are estimated, measures of individual well-being are obtained and can be used for the analysis of the relative importance of the multiple dimensions of poverty, the gender component of poverty and inequality and the causes and remedies of socioeconomic inequalities in health. Below we give some more details on social welfare and measuring preferences.
In the economics perspective, social welfare is a function of the well-being of the individuals. Constructing a synthetic indicator of social welfare requires taking position on how to compare well-being levels among individuals and how to aggregate individual well-being levels. The construction of a synthetic indicator rests on two sets of presuppositions.
First, income is not a good index of individual well-being. To go beyond income, several approaches have been developed in the recent economic literature. The approach that was favored in our project is that of the so-called “equivalent income”. First, it uses information about achievements in several objective dimensions. Second, it aggregates the achievements in those dimensions, individual by individual, using their own preferences. Preferences, one of the central concepts in economics, refer to how agents themselves trade-off among the different dimensions that constitute their life. Such preferences are subjective and typically differ across individuals. This approach needs information about individual’s position on many dimensions, but, most importantly, it also requires estimating individual preferences. Within this project, we collected the information that is necessary to make the concept of well-being (the “equivalent income”) operational.
Second, most existing poverty and inequality measurements are situated at the household level and do not take account of the possibly uneven distribution of well-being within households. There is a growing consensus, however, that a realistic modeling of household behavior must take into account preference heterogeneity within the household. In many cases, the household decision-making process cannot be explained by the restrictive unitary framework, which models the household as if it were a single decision maker: one needs collective, that is, multi-person household models. A key objective of this project was to gather information on all the individuals of the household.
To make the concept of equivalent income operational, one needs information about individual preferences. There are three main methods to estimate these preferences. The first one is based on the revealed preference approach, i.e., on the analysis of observed choice behavior. It consists in gathering information on individuals’ choices and their opportunity sets. Then, preferences are estimated so as to make sense of the observed choices as maximizing preferences over opportunity sets.
The second method to estimate preferences makes use of the answers to a “subjective satisfaction with life” (or happiness) question. These are questions like “on a scale from 1 to 7, can you express how satisfied you are with your current life?” The answers to this question are considered as a proxy for the well-being associated to the different bundles of dimensions of life, even when they cannot be chosen freely.
The third method is based on stated preferences and makes use of the contingent valuation methods that are typically used in health economics and in environmental economics – precisely to measure the subjective willingness to pay for variables that cannot be bought on a market. It consists in asking people to evaluate the income they would need to earn in order to be equally well off in different hypothetical scenarios (like being in perfect health, being employed, etc) as in their current situation.