DecompositionofGINI-coefficient.docVIP

Draft Comments appreciated Decomposition of Inequality Based on Incomplete Information A contributed paper to the IARIW 24th General Conference Lillehammer, Norway, August 18-24, 1996 Yuri Dikhanov Statistical Advisory Services International Economics Department, IECDD The World Bank 1818 H Street, N.W. Room N2-038 Washington, D.C. 20433 U.S.A. phone: (202)458-2667 fax: (202)522-3669 e-mail: ydikhanov@worldbank.org Abstract In this paper, the author examines five measures of inequality: the Gini coefficient, two entropy (Theil) indexes, normalized variance and decile ratio. It is shown how to decompose these indexes into intra-group and between-group inequalities. These indexes are used to study inequalities in the former Soviet republics in 1990. This study is based on incomplete information on income intervals (only income boundaries and population shares have been used). The robustness of the approximating procedure (piecewise polynomial interpolation of the cumulative distribution function) is discussed. Two alternative representations of the Gini coefficient are discussed as well. The views presented in this paper are the author’s and do not necessarily represent those of the World Bank or its Board of Directors. Introduction Analysis of income or wealth distribution often includes decomposing inequality for total population into between-group and within-group inequalities. Not all inequality measures are decomposable, and not all of the decomposable ones are decomposable in the same way. Theoretically, the second Theil measure (T2) has probably the best properties. The Gini index, however, is the most widely cited measure. In this paper we made an attempt to decompose the Gini index in a meaningful way (see Section IV). The Gini index, along with the two Theil measures, normalized variance and decile coefficient, was then used to analyze income inequalities in the former Soviet Union and its Republics in 1990 (see Section II and Annex). We f