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Is the Pareto–Lévy law a good representation of income distributions?

Authors
  • Dagsvik, John K.1
  • Jia, Zhiyang1
  • Vatne, Bjørn H.2
  • Zhu, Weizhen3
  • 1 Statistics Norway, Research Department, Oslo, Norway , Oslo (Norway)
  • 2 Central Bank of Norway, Financial Stability, Oslo, Norway , Oslo (Norway)
  • 3 Financial Supervisory Authority of Norway, Oslo, Norway , Oslo (Norway)
Type
Published Article
Journal
Empirical Economics
Publisher
Springer-Verlag
Publication Date
Dec 31, 2011
Volume
44
Issue
2
Pages
719–737
Identifiers
DOI: 10.1007/s00181-011-0539-z
Source
Springer Nature
Keywords
License
Yellow

Abstract

Mandelbrot (Int Econ Rev 1:79–106, 1960) proposed using the so-called Pareto–Lévy class of distributions as a framework for representing income distributions. We argue in this article that the Pareto–Lévy distribution is an interesting candidate for representing income distributions 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 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.

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