TY - JOUR
T1 - The limitations of negative incomes in the Gini coefficient decomposition by source
AU - Manero, Ana
N1 - Publisher Copyright:
© 2016 Informa UK Limited, trading as Taylor & Francis Group.
PY - 2017/8/16
Y1 - 2017/8/16
N2 - 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.
AB - 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.
KW - Gini coefficient
KW - inequality
KW - negative incomes
KW - policy
KW - source decomposition
UR - http://www.scopus.com/inward/record.url?scp=84992529741&partnerID=8YFLogxK
U2 - 10.1080/13504851.2016.1245828
DO - 10.1080/13504851.2016.1245828
M3 - Article
SN - 1350-4851
VL - 24
SP - 977
EP - 981
JO - Applied Economics Letters
JF - Applied Economics Letters
IS - 14
ER -