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Income distribution and inequality measurement: The problem of extreme values

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  • Cowell, Frank A.
  • Flachaire, Emmanuel

Abstract

We examine the statistical performance of inequality indices in the presence of extreme values in the data and show that these indices are very sensitive to the properties of the income distribution. Estimation and inference can be dramatically affected, especially when the tail of the income distribution is heavy, even when standard bootstrap methods are employed. However, use of appropriate methods for modelling the upper tail can greatly improve the performance of even those inequality indices that are normally considered particularly sensitive to extreme values.
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Suggested Citation

  • Cowell, Frank A. & Flachaire, Emmanuel, 2007. "Income distribution and inequality measurement: The problem of extreme values," Journal of Econometrics, Elsevier, vol. 141(2), pages 1044-1072, December.
  • Handle: RePEc:eee:econom:v:141:y:2007:i:2:p:1044-1072
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    References listed on IDEAS

    as
    1. Davidson, Russell & Flachaire, Emmanuel, 2007. "Asymptotic and bootstrap inference for inequality and poverty measures," Journal of Econometrics, Elsevier, vol. 141(1), pages 141-166, November.
    2. Andrew Chesher & Christian Schluter, 2002. "Welfare Measurement and Measurement Error," Review of Economic Studies, Oxford University Press, vol. 69(2), pages 357-378.
    3. Singh, S K & Maddala, G S, 1976. "A Function for Size Distribution of Incomes," Econometrica, Econometric Society, vol. 44(5), pages 963-970, September.
    4. Braulke, Michael, 1983. "An approximation to the Gini coefficient for a population based on sparse information for sub-groups," Journal of Development Economics, Elsevier, vol. 12(1-2), pages 75-81.
    5. McDonald, James B, 1984. "Some Generalized Functions for the Size Distribution of Income," Econometrica, Econometric Society, vol. 52(3), pages 647-663, May.
    6. Schluter, Christian & Trede, Mark, 2002. "Tails of Lorenz curves," Journal of Econometrics, Elsevier, vol. 109(1), pages 151-166, July.
    7. Cowell, Frank A & Victoria-Feser, Maria-Pia, 1996. "Robustness Properties of Inequality Measures," Econometrica, Econometric Society, vol. 64(1), pages 77-101, January.
    8. Cowell, Frank & Victoria-Feser, Maria-Pia, 2001. "Robust Lorenz curves : a semi-parametric approach," LSE Research Online Documents on Economics 2155, London School of Economics and Political Science, LSE Library.
    9. Anthony F. Shorrocks & James E. Foster, 1987. "Transfer Sensitive Inequality Measures," Review of Economic Studies, Oxford University Press, vol. 54(3), pages 485-497.
    10. Cowell, Frank A., 1989. "Sampling variance and decomposable inequality measures," Journal of Econometrics, Elsevier, vol. 42(1), pages 27-41, September.
    11. Peter Hall & Qiwei Yao, 2003. "Inference in Arch and Garch Models with Heavy--Tailed Errors," Econometrica, Econometric Society, vol. 71(1), pages 285-317, January.
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    More about this item

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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