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Rethinking Inequality Decomposition, with Evidence from Rural China

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  • Jonathan Morduch
  • Terry Sicular

Abstract

We introduce a new, integrated regression-based approach for decomposing inequality indices with household-level data, and we examine the strengths and weaknesses of inequality decompositions by income source in light of the way that they are commonly interpreted. The approach uses estimated income flows from variables in linear income equations to decompose aggregate inequality indices. The integrated approach provides an efficient and flexible way to quantify the roles of variables like education, age, infrastructure, and social status in a multivariate context. These tools are applied to a new data set with rich information on incomes in Zouping County in Shandong Province, China. The evidence from China illustrates the sharp differences that can result when using decomposition methods with varying properties, and it demonstrates advantages of the proposed, integrated method. We trace the differences to how the decomposition methodologies treat equally-distributed sources of income. The empirical results show the importance that spatial segmentations play in increasing inequality: village of residence strongly drives inequality in the sample. This force is counter-balanced in part by the relatively equitable distribution of human capital, especially demographic variables. Contrary to other recent findings, affiliation with the Communist Party and measures of social status have a very limited role in explaining inequality.

Suggested Citation

  • Jonathan Morduch & Terry Sicular, 1998. "Rethinking Inequality Decomposition, with Evidence from Rural China," Harvard Institute of Economic Research Working Papers 1831, Harvard - Institute of Economic Research.
  • Handle: RePEc:fth:harver:1831
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    1. Morduch, Jonathan & Sicular, Terry, 2000. "Politics, growth, and inequality in rural China: does it pay to join the Party?," Journal of Public Economics, Elsevier, vol. 77(3), pages 331-356, September.
    2. Benjamin, Dwayne & Brandt, Loren, 1997. "Land, Factor Markets, and Inequality in Rural China: Historical Evidence," Explorations in Economic History, Elsevier, vol. 34(4), pages 460-494, October.
    3. Jonathan Morduch & Terry Sicular, 2002. "Rethinking Inequality Decomposition, With Evidence from Rural China," Economic Journal, Royal Economic Society, vol. 112(476), pages 93-106, January.
    4. James E. Foster & Efe A. Ok, 1999. "Lorenz Dominance and the Variance of Logarithms," Econometrica, Econometric Society, vol. 67(4), pages 901-908, July.
    5. Sheldon Danziger, 1980. "Do Working Wives Increase Family Income Inequality?," Journal of Human Resources, University of Wisconsin Press, vol. 15(3), pages 444-451.
    6. John Knight & Li Shi, 1997. "Cumulative causation and inequality among villages in China," Oxford Development Studies, Taylor & Francis Journals, vol. 25(2), pages 149-172.
    7. Shorrocks, A F, 1982. "Inequality Decomposition by Factor Components," Econometrica, Econometric Society, vol. 50(1), pages 193-211, January.
    8. Anthony F. Shorrocks, 1983. "The Impact of Income Components on the Distribution of Family Incomes," The Quarterly Journal of Economics, Oxford University Press, vol. 98(2), pages 311-326.
    9. John C. H. Fei & Gustav Ranis & Shirley W. Y. Kuo, 1978. "Growth and the Family Distribution of Income by Factor Components," The Quarterly Journal of Economics, Oxford University Press, vol. 92(1), pages 17-53.
    10. Jyotsna Jalan & Martin Ravallion, 1998. "Geographic Poverty Traps?," Boston University - Institute for Economic Development 86, Boston University, Institute for Economic Development.
    11. Lerman, Robert I & Yitzhaki, Shlomo, 1985. "Income Inequality Effects by Income," The Review of Economics and Statistics, MIT Press, vol. 67(1), pages 151-156, February.
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