Underreporting of Top Incomes and Inequality: A Comparison of Correction Methods using Simulations and Linked Survey and Tax Data

Emmanuel Flachaire, Nora Lustig and Andrea Vigorito ()
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Andrea Vigorito: Instituo de Economia Universidad de la Republica

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Abstract: Household surveys do not capture incomes at the top of the distribution well. This yields biased inequality measures. We compare the performance of the reweighting and replacing methods to address top incomes underreporting in surveys using information from tax records. The biggest challenge is that the true threshold above which underreporting occurs is unknown. Relying on simulation, we construct a hypothetical true distribution and a "distorted" distribution that mimics an underreporting pattern found in a novel linked data for Uruguay. Our simulations show that if one chooses a threshold that is not close to the true one, corrected inequality measures may be significantly biased. Interestingly, the bias using the replacing method is less sensitive to the choice of threshold. We approach the threshold selection challenge in practice using the Uruguayan linked data. Our findings are analogous to the simulation exercise. These results, however, should not be considered a general assessment of the two methods.

Keywords: correction methods; household surveys; income underreporting; inequality; linked data; replacing; reweighting; tax records (search for similar items in EconPapers)
Date: 2022-10-11
New Economics Papers: this item is included in nep-iue
Note: View the original document on HAL open archive server: https://amu.hal.science/hal-03879312
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Citations: View citations in EconPapers (5)

Published in Review of Income and Wealth, inPress, ⟨10.1111/roiw.12618⟩

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Journal Article: Underreporting of Top Incomes and Inequality: A Comparison of Correction Methods using Simulations and Linked Survey and Tax Data (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03879312

DOI: 10.1111/roiw.12618

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