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Abstract

The purpose of this paper is to critically review and discuss several interpretations of inequality decomposition methods offered in the literature. In particular, I claim that the “property of uniform additions” is not necessarily a desired property of inequality decomposition methods. This applies to decomposition of inequality by income sources as well as to regression-based decomposition by determinants of income. Thus, relying on this property (or lack thereof) to judge against decompositions based on the Gini index of inequality may be misleading. The Gini decomposition rule is more intuitively interpretable than alternative rules, and allows the derivation of the marginal effect on inequality of a uniform increase in an income source or a determinant of income. The results of several competing decomposition rules are compared using simulations and a case study of farm household income in Georgia.

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