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

Ana Manero

    Research output: Contribution to journalArticle

    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.
    Original languageEnglish
    Pages (from-to)977-981pp
    JournalApplied Economics Letters
    Volume24
    Issue number14
    DOIs
    Publication statusPublished - 2017

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