Pareto models for top incomes and wealth

Arthur Charpentier and Emmanuel Flachaire
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Arthur Charpentier: UQAM - Université du Québec à Montréal = University of Québec in Montréal

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Abstract: Top incomes are often related to Pareto distribution. To date, economists have mostly used Pareto Type I distribution to model the upper tail of income and wealth distribution. It is a parametric distribution, with interesting properties, that can be easily linked to economic theory. In this paper, we first show that modeling top incomes with Pareto Type I distribution can lead to biased estimation of inequality, even with millions of observations. Then, we show that the Generalized Pareto distribution and, even more, the Extended Pareto distribution, are much less sensitive to the choice of the threshold. Thus, they can provide more reliable results. We discuss different types of bias that could be encountered in empirical studies and, we provide some guidance for practice. To illustrate, two applications are investigated, on the distribution of income in South Africa in 2012 and on the distribution of wealth in the United States in 2013.

Keywords: Pareto distribution; Top incomes; Inequality measures (search for similar items in EconPapers)
Date: 2022-03
New Economics Papers: this item is included in nep-ecm
Note: View the original document on HAL open archive server: https://amu.hal.science/hal-03649428
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Citations: View citations in EconPapers (6)

Published in Journal of Economic Inequality, 2022, 20 (1), pp.1-25. ⟨10.1007/s10888-021-09514-6⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03649428

DOI: 10.1007/s10888-021-09514-6

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