Modelling Lorenz Curves: Robust and Semi-Parametric Issues

20 Pages Posted: 9 Apr 2008

See all articles by Frank Cowell

Frank Cowell

London School of Economics & Political Science (LSE) - Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD)

Maria-Pia Victoria-Feser

University of Geneva - HEC

Date Written: March 2007

Abstract

Modelling Lorenz curves (LC) for stochastic dominance comparisons is central to the analysis of income distribution. It is conventional to use non-parametric statistics based on empirical income cumulants which are in the construction of LC and other related second-order dominance criteria. However, although attractive because of its simplicity and its apparent flexibility, this approach suffers from important drawbacks. While no assumptions need to be made regarding the data-generating process (income distribution model), the empirical LC can be very sensitive to data particularities, especially in the upper tail of the distribution. This robustness problem can lead in practice to 'wrong' interpretation of dominance orders. A possible remedy for this problem is the use of parametric or semi-parametric models for the datagenerating process and robust estimators to obtain parameter estimates. In this paper, we focus on the robust estimation of semi parametric LC and investigate issues such as sensitivity of LC estimators to data contamination (Cowell and Victoria-Feser 2002), trimmed LC (Cowell and Victoria-Feser 2006) and inference for trimmed LC (Cowell and Victoria-Feser 2003), robust semi-parametric estimation for LC (Cowell and Victoria-Feser 2007) selection of optimal thresholds for (robust) semi parametric modelling (Dupuis and Victoria-Feser 2006) and use both simulations and real data to illustrate these points.

JEL Classification: 13, 11

Suggested Citation

Cowell, Frank A. and Victoria-Feser, Maria-Pia, Modelling Lorenz Curves: Robust and Semi-Parametric Issues (March 2007). LSE STICERD Research Paper No. 91. Available at SSRN: https://ssrn.com/abstract=1117711

Frank A. Cowell (Contact Author)

London School of Economics & Political Science (LSE) - Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD) ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 (0)171-955 7277 (Phone)
+44 (0)171-242 2357 (Fax)

Maria-Pia Victoria-Feser

University of Geneva - HEC ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland

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