Global income poverty measurement with preference heterogeneity: Theory and application

Abstract

There is growing support for monitoring global poverty using a measure that accounts for both own and relative income. We show how – in the context of heterogeneous preferences over these factors – the well-known conflict between fairness and welfare-consistency can be resolved, providing the first preference-based foundation for both the established societal global poverty line and the recently proposed hierarchical poverty indices. We reformulate one hierarchical index as a modified headcount ratio. Unlike all classic poverty indices, this index is necessarily reduced when an individual escapes poverty. Our empirical illustration highlights that our proposed index substantially changes the assessment of global poverty reduction.