help for ineqfacStephen P. Jenkins (March 2020)

Inequality decomposition by factor components, following Shorrocks (1982a, b)

ineqfac facvars [weights]
[ if exp] [in range ]
[, i2 stats total(newvarname) ]

fweights, iweights pweightsand aweights
are allowed; see help weights.

Description

ineqfac provides an exact decomposition of the inequality of total
income into inequality contributions from each of the factor components
of total income. More specifically, given the set of factors

facvars = ,

define the variable totvar such that for each observation in the data set,

F
totvar = SUM (factor_f).
f=1

Shorrocks (1982a) proved that there was a unique 'decomposition rule'
for which inequality in totvar across observations could be expressed
as the sum of inequality contributions from each of the factor components,
and which also satisfied some other basic axioms. The decomposition rule
is the "proportionate contribution of factor f to total inequality", s_f:

s_f = rho_f*sd(factor_f)/sd(totvar)

where rho_f is the correlation between factor_f and totvar, and sd(.) is the
standard deviation. Equivalently, s_f is the slope coefficient from the
regression of factor_f on totvar. Observe that for each observation,

F
SUM (s_f) = 1.
f=1

Factor components with a positive value for s_f make a disqualizing contribution
to inequality in total income; factor components with negative s_f values make
an equalizing contribution.

Shorrocks shows that choice of the decomposition rule is an issue independent
of that concerning which index is used to summarise inequality. However there
happens to be a nice link with the case in which inequality is measured using
the coefficient of variation, for one can also re-write s_f as:

s_f = rho_f*[m(factor_f)/m(totvar)]*[CV(factor_f)/CV(totvar)]

where m(.) is the mean, and CV(.) is the coefficient of variation =
sd(.)/m(.). If m(factor_f) > 0 for every f, then also

s_f = rho_f*[m(factor_f)/m(totvar)]*[I2(factor_f)/I2(totvar)]^(.5)

where I2(.) = half the squared coefficient of variation (a member of the
Generalised Entropy class of inequality measures).

Thus total inequality can be written in terms of the factor correlations with
total income (rho_f), the factor shares in total income (m(factor_f)/m(totvar)),
and the factor inequalities (summarized using CV or I2).

ineqfac reports the estimates for each factor component of:
s_f, S_f = s_f*CV(totvar), m(factor_f)/m(totvar), rho_f, CV(factor_f), and
CV(factor_f)/CV(totvar), plus, optionally, the correlations, means
and standard deviations of the factor components and totvar. Optionally,
inequality may be summarised using I2 rather than CV as long as m(factor_f) > 0,
for every f. (It is the user's responsibility to check this condition holds.)

ineqfac was designed as a tool for income distribution analysis in the case
where the current sample contains observations on income components for each
of a set of income receiving units (e.g. families, households, persons).
In this case, facvars might include labour income, income from investments
and pensions, cash transfers, etc. See Shorrocks (1982b) and Jenkins (1995)
for examples. ineqfac may also be used to summarise and compare the
riskiness of portfolios of wealth holdings: s_f has the same form as
the "beta coefficient" used in finance analysis.

Options

stats provides the means, standard deviations, and correlations
of the factor components and totvar.

total(newvarname) creates a new variable equal to the sum of
the factor components for each observation.

i2 summarises inequality using I2 rather than CV. The option is available
only if every factor mean is positive.

Saved results

r(mean_total), r(sd_total)	mean, standard deviation, variance and CV for Total
r(var_total), r(cv_total)

r(rho_f) correlation between f and Total
r(sf_f), r(mean_f), proportionate inequality contribution, mean,
r(sd_f), r(var_f), r(cv_f)	standard deviation, variance, CV, and
r(share_f) share of total (mean_f/mean_total), for each factor, f.

Note: "f" is replaced by the factor's varname.

r(N) Number of non-missing observations used
r(nfactor) Number of factor variables
r(varlist) The names of the factor variables

Example

. ineqfac labour invest transfer, stats

. ineqfac labour invest transfer, stats total(grossi)

. generate negtax = -tax

. ineqfac labour invest transfer negtax, stats total(disposablei)

Author

Stephen P. Jenkins <s.jenkins@lse.ac.uk>

Acknowledgement

This is a minor update of the 2009 edition of ineqfac, for which
Andreas Peichl was a beta-tester. (ineqfac was first written for
Stata version 5.) This update adds reporting of rho_f to the results table
and to the saved results, and iweights and pweights are now allowed. Otherwise,
functionality is unchanged.

References

Jenkins, S.P. 1995. Accounting for Inequality Trends: Decomposition Analyses for the U.K., 1971-1986.
Economica 62: 29-63.

Shorrocks, A.F. 1982a. Inequality Decomposition by Factor Components.
Econometrica 50: 193-212.

Shorrocks, A.F. 1982b. The Impact of Income Components on the Distribution of Family Incomes.
Quarterly Journal of Economics 98: 311-326.

Also see

ineqdeco ineqdec0 ineqrbd if installed