Relative measures of economic insecurity

Abstract

We characterize a new class of individual measures of economic insecurity in a setting where there is a single relevant variable that can be interpreted as income or consumption. Insecurity is intended to capture the difficulties faced by an economic agent when confronted with adverse events. We work with an intertemporal model and base our measures on the changes in the variable when moving from one period to the next. Our approach is axiomatic and differs from the existing literature in two respects. First, we adopt a relative (scale-invariant) concept of insecurity and, second, we restrict attention to a relatively small set of requirements that we consider plausible and intuitively appealing. As a result, we identify a large class of measures that can be thought of as providing a tool box to empirical researchers who can select those members of our class that they consider suitable for the application in question. In addition, we present a dominance criterion based on our new insecurity measures.