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Paper No' DARP 050: | Full paper
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Keywords: Welfare dominance; Lorenz curve, Pareto model, M-estimators.
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This Paper is published under the following series: Distributional Analysis Research Programme
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Abstract:Lorenz curves and second-order dominance criteria are known to be sensitive to data contamination in the right tail of the distribution. We propose two ways of dealing with the problem: (1) Estimate Lorenz curves using parametric models for income distributions, and (2) Combine empirical estimation with a parametric (robust) estimation of the upper tail of the distribution using the Pareto model. Approach (2) is preferred because of its flexibility. Using simulations we show the dramatic effect of a few contaminated data on the Lorenz ranking and the performance of the robust approach (2). Statistical inference tools are also provided.
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