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Poverty, Income Distribution and CGE Modeling: Does the Functional Form of Distribution Matter?

  • Dorothée Boccanfuso
  • Bernard Decaluwé
  • Luc Savard

In this paper, we provide an overview of approaches used to model income distribution and poverty in CGE models. CGE models have started to use income distribution functional forms such as the lognormal, Pareto, beta distribution and Kernel non-parametric methods to apply GFT poverty indices. None of the authors of these papers have gone into much detail to justify the use of one method or functional form over the other, within the context of this type of work. Extensive literature exists on the choice of functional forms to estimate income distribution; however it has not been utilized in the CGE context. Given the fact that the desegregation of groups of households can be important in CGE analysis and the fact that the impact on income of policy simulations are often small in CGE models, we investigate the importance of othe choice of the functional form used to estimate the income distribution of groups of households. We compare six functional forms with parametric estimation and on a non-parametric method. Results show that no single form is more appropriate in all cases or groups of households. The characteristics of samples and subgroups play an important role and the choice shoudl be guided by the best fitting distribution.

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Paper provided by CIRPEE in its series Cahiers de recherche with number 0332.

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Date of creation: 2003
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Handle: RePEc:lvl:lacicr:0332
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  1. McDonald, James B & Ransom, Michael R, 1979. "Functional Forms, Estimation Techniques and the Distribution of Income," Econometrica, Econometric Society, vol. 47(6), pages 1513-25, November.
  2. Bourguignon, Francois & De Melo, Jaime & Suwa, Akiko, 1991. "Modeling the effects of adjustment programs on income distribution," World Development, Elsevier, vol. 19(11), pages 1527-1544, November.
  3. John Cockburn, 2002. "Trade Liberalisation and Poverty in Nepal A Computable General Equilibrium Micro Simulation Analysis," Economics Series Working Papers WPS/2002-11, University of Oxford, Department of Economics.
  4. Singh, S K & Maddala, G S, 1976. "A Function for Size Distribution of Incomes," Econometrica, Econometric Society, vol. 44(5), pages 963-70, September.
  5. Thorbecke, Erik, 1991. "Adjustment, growth and income distribution in Indonesia," World Development, Elsevier, vol. 19(11), pages 1595-1614, November.
  6. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, vol. 52(3), pages 761-66, May.
  7. McDonald, James B & Mantrala, Anand, 1995. "The Distribution of Personal Income: Revisited," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 10(2), pages 201-04, April-Jun.
  8. Michael B. Gordy, 1998. "A generalization of generalized beta distributions," Finance and Economics Discussion Series 1998-18, Board of Governors of the Federal Reserve System (U.S.).
  9. Sahota, Gian Singh, 1978. "Theories of Personal Income Distribution: A Survey," Journal of Economic Literature, American Economic Association, vol. 16(1), pages 1-55, March.
  10. McDonald, James B, 1984. "Some Generalized Functions for the Size Distribution of Income," Econometrica, Econometric Society, vol. 52(3), pages 647-63, May.
  11. Decaluwe, B. & Patry, A. & Savard, L. & Thorbecke, E., 1999. "Poverty Analysis Within a General Equilibrium Framework," Papers 9909, Laval - Recherche en Politique Economique.
  12. Majumder, Amita & Chakravarty, Satya Ranjan, 1990. "Distribution of Personal Income: Development of a New Model and Its Application to U.S. Income Data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 5(2), pages 189-96, April-Jun.
  13. McDonald, James B. & Xu, Yexiao J., 1995. "A generalization of the beta distribution with applications," Journal of Econometrics, Elsevier, vol. 69(2), pages 427-428, October.
  14. Morrisson, Christian, 1991. "Adjustment, incomes and poverty in Morocco," World Development, Elsevier, vol. 19(11), pages 1633-1651, November.
  15. Chia, Ngee-Choon & Wahba, Sadek & Whalley, John, 1994. "Poverty-Reducing Targeting Programmes: A General Equilibrium Approach," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 3(2), pages 309-38, October.
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