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The limitations of negative incomes in the Gini coefficient decomposition by source

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  • Ana Manero

Abstract

Lerman and Yitzhaki (1985) developed a decomposition of the Gini coefficient by income source that has been extensively used in the literature. This method has strong limitations in the presence of negative incomes, which were not discussed by the original authors and have been widely overlooked in successive studies. Through theoretical argumentation and practical examples, this article shows that, when using negative incomes, (1) the original decomposition formulae become inappropriate, (2) the marginal effects analysis may yield erroneous results and (3) the Pigou–Dalton ‘principle of transfers’ is not always met. This has critical implications for policy development, given that strategies based upon incorrect analyses could actually result in undesired greater income inequalities. The Gini source decomposition should be carefully applied by researchers and policymakers, especially in rural developing areas, where negative incomes are common due to financial losses from agricultural activities.

Suggested Citation

  • Ana Manero, 2017. "The limitations of negative incomes in the Gini coefficient decomposition by source," Applied Economics Letters, Taylor & Francis Journals, vol. 24(14), pages 977-981, August.
    • Handle: RePEc:taf:apeclt:v:24:y:2017:i:14:p:977-981
    DOI: 10.1080/13504851.2016.1245828
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    Cited by:

    1. Gordon Anderson & Oliver Linton & Maria Grazia Pittau & Yoon-Jae Whang & Roberto Zelli, 2021. "On unit free assessment of the extent of multilateral distributional variation," The Econometrics Journal, Royal Economic Society, vol. 24(3), pages 502-518.
    2. Francesco Porro & Mariangela Zenga, 2023. "Decompositions by sources and by subpopulations of the Pietra index: two applications to professional football teams in Italy," AStA Advances in Statistical Analysis, Springer;German Statistical Society, vol. 107(1), pages 73-100, March.

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