Lower Bounds and the Linearity Assumption in Parametric Estimations of Inequality of Opportunity

21 Pages Posted: 11 Jan 2016

See all articles by Paul Hufe

Paul Hufe

Centre for European Economic Research (ZEW)

Andreas Peichl

ZEW – Leibniz Centre for European Economic Research; University of Mannheim - School of Economics (VWL); IZA Institute of Labor Economics; University of Essex - Institute for Social and Economic Research (ISER)

Abstract

The consistent underestimation of inequality of opportunity has led some scholars to call into question the usefulness of such estimates. In this paper we argue that neglecting heterogeneity in the influence of circumstances across types as well as neglecting heterogeneity in type-specific effort distributions are two important sources of the downward bias in inequality of opportunity measures. Compared to the standard parametric approach of ex ante measurement of inequality of opportunity, we calculate a 50% upwards correction when accounting for both sources of heterogeneity. Therefore, taking heterogeneity across types seriously is an important step towards strengthening the policy relevance of this concept.

Keywords: equality of opportunity, type heterogeneity, parametric estimation

JEL Classification: D63, D3

Suggested Citation

Hufe, Paul and Peichl, Andreas, Lower Bounds and the Linearity Assumption in Parametric Estimations of Inequality of Opportunity. IZA Discussion Paper No. 9605, Available at SSRN: https://ssrn.com/abstract=2713026 or http://dx.doi.org/10.2139/ssrn.2713026

Paul Hufe (Contact Author)

Centre for European Economic Research (ZEW) ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Andreas Peichl

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

University of Mannheim - School of Economics (VWL) ( email )

Mannheim 68131
Germany

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

University of Essex - Institute for Social and Economic Research (ISER)

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

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