Capturing preferences for inequality aversion in decision support

Abstract

We investigate the situation where there is interest in ranking distributions (of income, of wealth, of health, of service levels) across a population, in which individuals are considered preferentially indistinguishable and where there is some limited information about social preferences. We use a natural dominance relation, generalised Lorenz dominance, used in welfare comparisons in economic theory. In some settings there may be additional information about preferences (for example, if there is policy statement that one distribution is preferred to another) and any dominance relation should respect such preferences. However, characterising this sort of conditional dominance relation (specifically, dominance with respect to the set of all symmetric increasing quasiconcave functions in line with given preference information) turns out to be computationally challenging. This challenge comes about because, through the assumption of symmetry, any one preference statement (“I prefer giving $100 to Jane and $110 to John over giving $150 to Jane and $90 to John”) implies a large number of other preference statements (“I prefer giving $110 to Jane and $100 to John over giving $150 to Jane and $90 to John”; “I prefer giving $100 to Jane and $110 to John over giving $90 to Jane and $150 to John”). We present theoretical results that help deal with these challenges and present tractable linear programming formulations for testing whether dominance holds between any given pair of distributions. We also propose an interactive decision support procedure for ranking a given set of distributions and demonstrate its performance through computational testing.