Path independent inequality measures

This paper explores a natural decomposition property motivated by Shorrocks (1980, Econometrica 48, 613-625) and Anand (1983, "Inequality and poverty in Malaysia," Oxford University Press) that we call path indepentent decomp osability. Between-group inequality is found by applying the inequality mea sure to the smoothed distribution, which replaces each income in a subgroup with its representative income. Within-group inequality is the measure app lied to the standardized distribution, which rescales subgroup distribution s to a common representative income level. Path independence requires overa ll inequality to be the sum of these two terms. We derive the associated cl ass of relative inequality measures-a single parameter family containing bo th the second Theil measure (the mean logarithmic deviation) and the varian ce of logarithms. Journal of Economic Literature Classification Numbers: C4 3, D31, D63, 015. (C) 2000 Academic Press.