Identification-robust methods for comparing inequality with an application to regional disparities

Jean-Marie Dufour, Emmanuel Flachaire, Lynda Khalaf and Abdallah Zalghout
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Jean-Marie Dufour: McGill University = Université McGill [Montréal, Canada]
Emmanuel Flachaire: AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique, AMU - Aix Marseille Université
Lynda Khalaf: University of Ottawa [Ottawa]
Abdallah Zalghout: MacEwan University

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Abstract: We propose Fieller-type methods for inference on generalized entropy inequality indices in the context of the two-sample problem which covers testing the statistical significance of the difference in indices, and the construction of a confidence set for this difference. In addition to irregularities arising from thick distributional tails, standard inference procedures are prone to identification problems because of the ratio transformation that defines the considered indices. Simulation results show that our proposed method outperforms existing counterparts including simulation-based permutation methods and results are robust to different assumptions about the shape of the null distributions. Improvements are most notable for indices that put more weight on the right tail of the distribution and for sample sizes that match macroeconomic type inequality analysis. While irregularities arising from the right tail have long been documented, we find that left tail irregularities are equally important in explaining the failure of standard inference methods. We apply our proposed method to analyze income per-capita inequality across U.S. states and non-OECD countries. Empirical results illustrate how Fieller-based confidence sets can: (i) differ consequentially from available ones leading to conflicts in test decisions, and (ii) reveal prohibitive estimation uncertainty in the form of unbounded outcomes which serve as proper warning against flawed interpretations of statistical tests.

Keywords: Inequality; Generalized entropy; Two samples; Fieller; Identification-robust (search for similar items in EconPapers)
Date: 2024-02-14
Note: View the original document on HAL open archive server: https://hal.science/hal-04676480v1
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Published in Journal of Economic Inequality, 2024, 22 (2), pp.433-452. ⟨10.1007/s10888-023-09600-x⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04676480

DOI: 10.1007/s10888-023-09600-x

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