Modeling the incomes of the upper-class group in Malaysia using new pareto-type distribution

Document Type

Article

Publication Date

10-1-2022

Abstract

The new Pareto-type distribution has been previously introduced as an alternative to the conventional Pareto distribution in modeling income distribution. It is claimed to provide better flexibility for mathematical simplicity of probability functions and has a more straightforward mathematical form. In this study, the new Pareto-type distribution is used to model the income of the Malaysian upper-class group. The threshold is determined using the fixed proportion technique and the maximum likelihood estimator method is used to estimate the shape parameter. Then, the goodness-of-fit of the fitted new Pareto model is measured using the coefficient of determination, R-2 and Kolmogorov-Smirnov statistics. We also measure the income inequality among the Malaysian top income earners using the Lorenz curve, Gini and Theil indices based on the fitted new Pareto model. Finally, the new Pareto distribution is compared to alternative distributions to analyze which model can give the best fit for the data. Our analysis shows that the Pareto type-1 and the new Pareto models are well fitted to the top income data for all years considered. However, the new Pareto model provides better flexibility which covering more incomes in the upper tail of the distribution than the Pareto type-1 model.

Keywords

Gini index, Income inequality, Lorenz curve, Pareto model, Theil index

Publication Title

Sains Malaysiana

Divisions

MathematicalSciences

Funders

Universiti Malaya GPF088B-2020,RF011B 2018FS

Volume

51

Issue

10

Publisher

Penerbit Universiti Kebangsaan Malaysia

Publisher Location

FACULTY SCIENCE & TECHNOLOGY, BANGI, SELANGOR, 43600, MALAYSIA

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