New Classical Income Measurement: A Choice-Theoretic Axiomatic Approach
journal contributionposted on 01.07.2006, 00:00 by Jeremy Bertomeu, Jinghong Liang
At the fundamental level, the key challenge to a theory of income measurement is to resolve the problem caused by soft information, which leads to incomplete preferences within the entity (i.e. some alternatives are not always unambiguously ranked). This paper presents a formal axiomatic foundation for income measurement, building on several recent developments in the economic theory of choice. We first design a meaningful income measure for an entity with incomplete preferences. When there is enough hard information, this measure consists of finitely-many performance criteria (Line-Item Income Measure) which fully represent the incomplete decision problem of the entity. Second, a single-valued income measure (Summary Income Measure) is introduced, which extends classical income to incomplete preferences. Third, these measures can be operational and exhibit recognizable features such as linear aggregation over time and individual operating units.