Abstract
This paper explores income distribution modeling approaches for poverty analysis in a CGE micro-simulation context. Income distribution functional forms such as the lognormal, Pareto, beta distribution and empirical methods are currently used in CGE models in parallel with the estimation of FGT poverty indices. The particular methods or functional forms used in this context are not always clearly defined and justified. In this paper, we investigate and provide better criteria for selecting a functional distribution for poverty analysis. To achieve this, we apply parametric estimation to seven functional forms and compare the results to a purely “empirical” method. The results showed that no single form is more appropriate in all instances or for all household subgroups. The choice of a modeling approach should be motivated by a search for best fit and should be based on appropriate statistical tests. Selecting inappropriate distributional forms can lead to biased results in terms of poverty analysis. Introducing functional forms in the empirical approach can also provide greater confidence in the results obtained.
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Abbreviations
- AUE:
-
other urban educated
- AUNE:
-
other-urban non-educated
- BN:
-
basic needs
- CDF:
-
cumulative density function
- CES:
-
constant elasticity of substitution
- CET:
-
constant elasticity of transformation
- CGE:
-
computable general equilibrium
- Champ:
-
Champernowne
- DAD:
-
distributive analysis – analyse distributive
- DAG:
-
Dagum
- DKRE:
-
Dakar educated
- DKRNE:
-
Dakar non-educated
- E:
-
nominal exchange rate
- EDF:
-
empirical distribution function
- ESAM:
-
enquête sénégalaise auprès des ménages
- FGT:
-
Foster, Greer and Thorbecke
- Logn:
-
lognormal
- Logn3:
-
displaced lognormal
- OECD:
-
Organization for Economic Co-operation and Development
- Pdf:
-
probability density function
- r:
-
rental rate of capital
- RE:
-
rural educated
- RNE:
-
rural non-educated
- w:
-
skilled wages;
- SAE:
-
sum of absolute errors
- SAM:
-
social accounting matrix
- Sg:
-
government savings;
- SM:
-
Singh–Maddala
- wn:
-
unskilled wages;
- SSE:
-
sum of squared errors
- Yg:
-
Government income
- Ytm:
-
total household income;
- Va:
-
value-added
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An erratum to this article can be found at http://dx.doi.org/10.1007/s10888-008-9084-1
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Boccanfuso, D., Decaluwé, B. & Savard, L. Poverty, income distribution and CGE micro-simulation modeling: Does the functional form of distribution matter?. J Econ Inequal 6, 149–184 (2008). https://doi.org/10.1007/s10888-007-9055-y
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DOI: https://doi.org/10.1007/s10888-007-9055-y
Keywords
- Computable general equilibrium models
- Estimation
- Measurement and poverty analysis
- Personal income and wealth distribution