Stanford Center for International Development Working Paper No. 447 Decomposition of Gini Coefficient Based on Axioms and a New Between-Subgroup Inequality Measure

Since Soltow (1960) first addressed the question of the Gini coefficient decomposition by population subgroups (hereinafter referred to as decomposition), there are more than a dozen different decompositions available in the literature. Whether the Gini coefficient is decomposable and, furthermore, whether the decomposition practices are arbitrary are debated in the literature, since there is no convincing demonstration that any of the methods has an overwhelming advantage over another. In this paper, I decompose the Gini coefficient based on a set of axioms and, most importantly, resolve the issue of the arbitrariness of current decompositions. The new decomposition will be defended against the common criticism that between-subgroup components and overall inequality don't share an identical metric. I will propose new between-subgroup inequality measures that can apply to any two groups, and demonstrate their properties as general inequality measures. The social welfare implications of the decomposition will then be explained.