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Top incomes, heavy tails, and rank-size regressions

Top incomes, heavy tails, and rank-size regressions
Top incomes, heavy tails, and rank-size regressions
In economics, rank-size regressions provide popular estimators of tail exponents of heavy-tailed distributions. We discuss the properties of this approach when the tail of the distribution is regularly varying rather than strictly Pareto. The estimator then over-estimates the true value in the leading parametric income models (so the upper income tail is less heavy than estimated), which leads to test size distortions and undermines inference. For practical work, we propose a sensitivity analysis based on regression diagnostics in order to assess the likely impact of the distortion. The methods are illustrated using data on top incomes in the UK.
2225-1146
1-16
Schluter, Christian
ae043254-4cc4-48aa-abad-56a36554de2b
Schluter, Christian
ae043254-4cc4-48aa-abad-56a36554de2b

Schluter, Christian (2018) Top incomes, heavy tails, and rank-size regressions. Econometrics, 6 (10), 1-16. (doi:10.3390/econometrics6010010).

Record type: Article

Abstract

In economics, rank-size regressions provide popular estimators of tail exponents of heavy-tailed distributions. We discuss the properties of this approach when the tail of the distribution is regularly varying rather than strictly Pareto. The estimator then over-estimates the true value in the leading parametric income models (so the upper income tail is less heavy than estimated), which leads to test size distortions and undermines inference. For practical work, we propose a sensitivity analysis based on regression diagnostics in order to assess the likely impact of the distortion. The methods are illustrated using data on top incomes in the UK.

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More information

Accepted/In Press date: 20 February 2018
e-pub ahead of print date: 2 March 2018
Published date: 2 March 2018

Identifiers

Local EPrints ID: 418602
URI: http://eprints.soton.ac.uk/id/eprint/418602
ISSN: 2225-1146
PURE UUID: 9ad749dd-2f7f-4503-8efd-daac07463283

Catalogue record

Date deposited: 12 Mar 2018 17:30
Last modified: 19 Jul 2019 17:27

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