Modelling income data using two extensions of the exponential distribution

Enrique Calderín-Ojeda, Francisco Azpitarte and Emilio Gómez-Déniz

Physica A: Statistical Mechanics and its Applications, 2016, vol. 461, issue C, 756-766

Abstract: In this paper we propose two extensions of the Exponential model to describe income distributions. The Exponential ArcTan (EAT) and the composite EAT–Lognormal models discussed in this paper preserve key properties of the Exponential model including its capacity to model distributions with zero incomes. This is an important feature as the presence of zeros conditions the modelling of income distributions as it rules out the possibility of using many parametric models commonly used in the literature. Many researchers opt for excluding the zeros from the analysis, however, this may not be a sensible approach especially when the number of zeros is large or if one is interested in accurately describing the lower part of the distribution. We apply the EAT and the EAT–Lognormal models to study the distribution of incomes in Australia for the period 2001–2012. We find that these models in general outperform the Gamma and Exponential models while preserving the capacity of the latter to model zeros.

Keywords: Income distribution; Australia; Mixture model; Exponential distribution; Lognormal distribution; Zero Income (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:461:y:2016:i:c:p:756-766

DOI: 10.1016/j.physa.2016.06.047

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