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A New Inequality Measure that is Sensitive to Extreme Values and Asymmetries

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McAleer, Michael and Ryu, Hang K. and Slottje, Daniel J. (2017) A New Inequality Measure that is Sensitive to Extreme Values and Asymmetries. [ Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 25, 2017, ISSN: 2341-2356 ]

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Abstract

There is a vast literature on the selection of an appropriate index of income inequality and on what desirable properties such a measure (or index) should contain. The Gini index is, of course, the most popular. There is a concurrent literature on the use of hypothetical statistical distributions to approximate and describe an observed distribution of incomes. Pareto and others observed early on that incomes tend to be heavily right-tailed in their distribution. These asymmetries led to approximating the observed income distributions with extreme value hypothetical statistical distributions, such as the Pareto distribution. But these income distribution functions (IDFs) continue to be described with a single index (such as the Gini) that poorly detects the extreme values present in the underlying empirical IDF. This paper introduces a new inequality measure to supplement, but not to replace, the Gini that measures more accurately the inherent asymmetries and extreme values that are present in observed income distributions. The new measure is based on a third-order term of a Legendre polynomial from the logarithm of a share function (or Lorenz curve). We advocate using the two measures together to provide a better description of inequality inherent in empirical income distributions with extreme values.


Item Type:Working Paper or Technical Report
Uncontrolled Keywords:Inequality Index, Extreme value distributions, Maximum entropy method, Orthonormal basis, Legendre polynomials.
Subjects:Social sciences > Economics > Microeconomics
JEL:D31, D63
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volume:2017
Number:25
ID Code:45315
Deposited On:02 Nov 2017 09:20
Last Modified:02 Nov 2017 16:12

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