ARTICLE | Vol. 53, Issue2, 2020 | Canadian Journal of Economics

Abstract

We introduce a Bayesian approach for assessing Lorenz and stochastic dominance. For two income distributions, say X and Y , estimated via Markov chain Monte Carlo, we describe how to compute posterior probabilities for: (i) X dominates Y , (ii) Y dominates X and (iii) neither Y nor X dominates. The proposed approach is applied to Indonesian income distributions using mixtures of gamma densities that ensure flexible modelling. Probability curves depicting the probability of dominance at each population proportion are used to explain changes in dominance probabilities over restricted ranges relevant for poverty orderings. They also explain some seemingly contradictory outcomes from the p‐values of some sampling theory tests.