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Microeconomics · Hard · 30 marks

IEO past paper: 2022 International Economics Olympiad, open questions

Question 1. "Measuring Inequality" In most of the tasks about inequality that you might encounter, the data on income or wealth is given and is not questioned. In reality, however, the estimates of these numbers can be biased, and these biases can make an unjustified impression about whether inequality is high or low. Unjustified impressions, in their turn, may lead to unreasonable policy-making. In this task, we will discuss what these biases might be and where they can come from.

(a)Ann uses the administrative (tax) microdata to estimate the income inequality in country N. In particular, she takes the amounts of income tax paid by all households per year, calculates incomes dividing tax payments by the tax rates and gets the Gini coefficient based on this income distribution. Bob argues that due to this approach, Ann is likely to overlook a substantial part of the real income distribution. What part is it? Does this bias lead to overestimating or underestimating the extent of income inequality?[10](b)Bob uses the surveys data to estimate the income inequality in country N. In particular, he refers to the statistics obtained by a sociological service that regularly asks people about their households' consumption spending (income surveys are also available, but Bob doesn't trust how households report their incomes). Ann argues that Bob's results are biased, too. Why is that? Does this bias lead to overestimating or underestimating the extent of income inequality?[10](c)Carol believes that over time, top 1 percent of incomes in country N are rising more quickly than average incomes. To verify this belief, she has taken Ann's and Bob's estimates at different times. It turned out that one of them does not contradict the belief, but the other one does. Explain which one is which and why it is so.[10]

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