Global Income Poverty Measurement with Preference Heterogeneity: Theory and Application

There is growing support for using global income poverty measures that account for both own income and relative income. The World Bank has adopted a global line that depends on both. Unfortunately, with preference heterogeneity over own and relative income, the standard poverty indices are not necessarily reduced when a poor individual escapes poverty. We develop a theory of global poverty measurement with preference heterogeneity. Surprisingly, a simple modification of the headcount ratio encapsulates the main features of our theory, in contrast to all of the standard indices. Notably, our proposed index decreases if a poor individual escapes poverty when her income rises above the absolute line. This alternative index is ready to use, as it does not require eliciting preferences. For the period 1999-2015, our proposed index implies a global poverty reduction that is 50% higher than the current estimates based on the headcount ratio.