Exploring the Sources of Downward Bias in Measuring Inequality of Opportunity

Exploring the Sources of Downward Bias in Measuring Inequality of Opportunity

This study analyzes the extent of downward bias in the calculation of inequality of opportunity for continuous outcomes such as income. A typically recognized source of bias is the unobserved circumstances as there is a limited set of variables...

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Bibliographic Details
Main Authors:	Lara Ibarra, Gabriel, Martinez Cruz, Adan L.
Format:	Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2015
Subjects:	LIVING STANDARDS EQUAL OPPORTUNITY HOUSEHOLD SURVEY POPULATION DISTRIBUTION POPULATION EDUCATION ECONOMIC GROWTH CAPITAL ACCUMULATION INCOME INTEREST NORMAL DISTRIBUTION INCOME INCREASE SIMULATIONS INEQUALITY INDEX LABOR FORCE DEVELOPING COUNTRIES HEALTH CARE INDIVIDUAL CHOICES POLITICAL ECONOMY EMPIRICAL ISSUE WELFARE MEAN LOG DEVIATION INCENTIVES DISTRIBUTION POLICY DISCUSSIONS VARIABLES WEALTH MEASURES RURAL COMMUNITY EMPIRICAL LITERATURE EXPERIMENTAL DESIGN NATURAL LOG PUBLIC POLICY BETWEEN-GROUP INEQUALITY ABSOLUTE VALUE DEVELOPMENT ECONOMICS EDUCATIONAL ATTAINMENT DESCRIPTIVE STATISTICS INEQUALITY MEASURES INCOME INEQUALITY AVERAGE INCOME GINI INDEX HOUSEHOLD INCOME EXPLANATORY VARIABLES ANTI-POVERTY INDICATORS PRODUCT UTILITY MENTAL HEALTH MORTALITY RESPECT PROGRESS INFANT MORTALITY FREE WILL CONSUMPTION HUMAN CAPITAL INFANT ECONOMIC SURVEYS EMPIRICAL APPROACHES WAGES POLICIES ECONOMIC OUTCOMES HIGHER INEQUALITY REGIONAL DUMMIES POLICY RESEARCH WORKING PAPER PUBLIC POLICIES VALUE RELATIVE POSITION DEPENDENT VARIABLE INCOME DIFFERENTIALS POLICY MAKERS DISTRIBUTION FUNCTION INCOME DISTRIBUTIONS PURCHASING POWER NEGATIVE EFFECT INCOME DISTRIBUTION SOCIAL MOVEMENTS INCOMES POSITIVE CORRELATION RURAL MEASUREMENT DOWNWARD BIAS POPULATIONS MOTHER SURVEYS POLICY CUMULATIVE DISTRIBUTION FUNCTION ECONOMIC INEQUALITY EMPIRICAL REGULARITY ANTI-POVERTY POLICY TAXATION ECONOMIC DEVELOPMENT LOW INCOME GROUP INEQUALITY THEORY POVERTY POPULATION EQUALITY OF OPPORTUNITY NEONATAL MORTALITY PRACTITIONERS POLICY RESEARCH RISING INEQUALITY POOR MEASURING INEQUALITY LACK OF INFORMATION OUTCOMES HEALTH SERVICES PUBLIC AFFAIRS INCOME TAXATION HUMAN DEVELOPMENT DEVELOPMENT POLICY INEQUALITY
Online Access:	http://documents.worldbank.org/curated/en/2015/10/25203297/exploring-sources-downward-bias-measuring-inequality-opportunity http://hdl.handle.net/10986/22881

Description
Summary:	This study analyzes the extent of downward bias in the calculation of inequality of opportunity for continuous outcomes such as income. A typically recognized source of bias is the unobserved circumstances as there is a limited set of variables available in household and labor force surveys. Another previously overlooked source is the likely unobservable nature of top incomes. Using Monte Carlo simulations where the underlying inequality of opportunity is predetermined at various levels, the study presents three key findings. First, the omission of a relevant circumstance can bias the inequality of opportunity estimate by as much as 80 percent, depending on how much variation of the outcome such circumstance explains. Second, not observing the top 5 percent of the income distribution can lead to downward biases of anywhere between 12 and 35 percent, and the combination of missing the most favored population and even one relevant circumstance exacerbates the bias of the empirical estimates. The third key result is that the estimated inequality of opportunity is strongly correlated with the amount of variation in the outcome variable explained by the combination of circumstances (measured by the R2). This result suggests that in empirical applications, the inequality of opportunity estimate can be roughly (and quickly) approximated using simple econometric techniques.

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