Robust Stochastic Dominance: A Semi-Parametric Approach

The Journal of Economic Inequality, Vol. 5, No. 1, pp. 21-37, 2007

18 Pages Posted: 12 Feb 2011

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: September 14, 2006

Abstract

Lorenz curves and second-order dominance criteria, the fundamental tools for stochastic dominance, are known to be sensitive to data contamination in the tails of the distribution. We propose two ways of dealing with the problem: (1) Estimate Lorenz curves using parametric models and (2) combine empirical estimation with a parametric (robust) estimation of the upper tail of the distribution using the Pareto model. Approach (2) is preferred because of its flexibility. Using simulations we show the dramatic effect of a few contaminated data on the Lorenz ranking and the performance of the robust semi-parametric approach (2). Since estimation is only a first step for statistical inference and since semi-parametric models are not straightforward to handle, we also derive asymptotic covariance matrices for our semi-parametric estimators.

Keywords: Lorenz curve, M-estimators, Pareto model, welfare dominance

Suggested Citation

Cowell, Frank A. and Victoria-Feser, Maria-Pia, Robust Stochastic Dominance: A Semi-Parametric Approach (September 14, 2006). The Journal of Economic Inequality, Vol. 5, No. 1, pp. 21-37, 2007. Available at SSRN: https://ssrn.com/abstract=1760024

Frank A. Cowell

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 (Contact Author)

University of Geneva - HEC ( email )

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

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