Is the Pareto-Lévy Law a Good Representation of Income Distributions?

John K. Dagsvik (), Weizhen Zhu (), Bjørn H. Vatne () and Zhiyang Jia

No 568, LIS Working papers from LIS Cross-National Data Center in Luxembourg

Abstract: Mandelbrot (1960) proposed using the so-called Pareto-Lévy class of distributions as a framework for representing income distributions. We argue in this paper that the Pareto-Lévy distribution is an interesting candidate for representing income distribution because its parameters are easy to interpret and it satisfies a specific invariance-under-aggregation property. We also demonstrate that the Gini coefficient can be expressed as a simple formula of the parameters of the Pareto-Lévy distribution. We subsequently use wage and income data for Norway and seven other OECD countries to fit the Pareto- Lévy distribution as well as the Generalized Beta type II (GB2) distribution. The results show that the Pareto-Lévy distribution fits the data better than the GB2 distribution for most countries, despite the fact that GB2 distribution has four parameters whereas the Pareto-Lévy distribution has only three.

Keywords: Stable distributions; Pareto Lévy distribution; income distributions; invariance principles; Generalized Beta distributions (search for similar items in EconPapers)
JEL-codes: C21 C46 C52 D31 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2011-08
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in Empirical Economics 44, no. 2 (2013): 719–737

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Journal Article: Is the Pareto–Lévy law a good representation of income distributions? (2013)
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