Stochastic Dominance: Risk Preference Estimation, Health Inequality and Income Inequality Ordering(2/3)

Project Details

Description

This is a three-year project. All of them are related to stochastic dominance. For the first year project, I will use empirical data to estimate the preference parameters in almost stochastic dominance (ASD) established by Leshno and Levy (2002). Recently, the finance literature has shown that ASD is helpful in explaining some puzzles in finance. However, their conclusions heavily rely on the estimation of the preference parameters in the ASD rules provided by Levy et al. (2010) which is not only obtained from artificial tasks designed in laboratory but also adopt the incorrect condition in ASD. Our project is the first one in the literature using empirical observations in portfolio choice decisions and adopting the correct conditions to estimate the preference parameters in ASD. Our findings can help understanding investors’ risk preference as well as reexamining the current empirical findings in finance. For the second year project, I will establish the conditions to identify robust ordering of socioeconomic health inequality for most policymakers. The measurement of health inequality is an important issue in economics, public health and epidemiology. Recently, the literature has provided the conditions to identify robust ordering of health inequality, but the conditions are very rigid. It is because that both papers consider all weight functions on health scores for different groups of socioeconomic status which represent the judgments of inequality aversion. These weight functions allow zero weights. However, in reality, most policymakers will not place zero weight on any specific group. Thus, this project will seek for the robust ordering of socioeconomic health inequality by excluding extreme weight functions. Our rule can significantly improve the applicability of the health inequality measurement. For the third year project, I will provide continua of the inequality relations between income inequality aversion and downside inequality aversion. It is almost universally assumed that a mean-preserving spread in income distribution is less preferred to all policymakers, which implies convex inequality indices in the inequality analysis. The recent literature employs additional assumption: policymakers are downside inequality averse, which means that the slope of the inequality indices is concave globally. However, the assumption of downside inequality aversion is very strong. In this project, I relax this strong assumption on the slope of the inequality indices and seek for an unambiguous prediction. The new notion of income inequality measurement derived in this paper can help to distinguish the ranking of income distributions.
StatusFinished
Effective start/end date1/08/1931/07/20

UN Sustainable Development Goals

In 2015, UN member states agreed to 17 global Sustainable Development Goals (SDGs) to end poverty, protect the planet and ensure prosperity for all. This project contributes towards the following SDG(s):

  • SDG 1 - No Poverty
  • SDG 10 - Reduced Inequalities
  • SDG 17 - Partnerships for the Goals

Keywords

  • stochastic dominance
  • almost stochastic dominance
  • risk preference
  • health inequality
  • income inequality

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