Generalized entropy index

The generalized entropy index has been proposed as a measure of income inequality in a population. It is derived from information theory as a measure of redundancy in data. In information theory a measure of redundancy can be interpreted as non-randomness or data compression; thus this interpretation also applies to this index. In additional interpretation of the index is as biodiversity as entropy has also been proposed as a measure of diversity. The generalized entropy index has been proposed as a measure of income inequality in a population. It is derived from information theory as a measure of redundancy in data. In information theory a measure of redundancy can be interpreted as non-randomness or data compression; thus this interpretation also applies to this index. In additional interpretation of the index is as biodiversity as entropy has also been proposed as a measure of diversity. The formula for general entropy for real values of α {displaystyle alpha } is: where N is the number of cases (e.g., households or families), y i {displaystyle y_{i}} is the income for case i and α {displaystyle alpha } is a parameter which regulates the weight given to distances between incomes at different parts of the income distribution. For large α {displaystyle alpha } the index is especially sensitive to the existence of large incomes, whereas for small α {displaystyle alpha } the index is especially sensitive to the existence of small incomes. An Atkinson index index for any inequality aversion parameter can be derived from a generalized entropy index under the restriction that ϵ = 1 − α {displaystyle epsilon =1-alpha } - i.e an Atkinson index with high inequality aversion is derived from a GE index with small α {displaystyle alpha } . Moreover, it is the unique class of inequality measures that is a monotone transformation of the Atkinson index and which is additive decomposable. Many popular indices, including Gini index, do not satisfy additive decomposability. The formula for deriving an Atkinson index with inequality aversion parameter ϵ {displaystyle epsilon } under the restriction ϵ = 1 − α {displaystyle epsilon =1-alpha } is given by: A = [ ϵ ( ϵ − 1 ) G E ] ( 1 / ( 1 − ϵ ) ) ϵ ≠ 1 {displaystyle A=^{(1/(1-epsilon ))}qquad epsilon eq 1} A = 1 − e − G E ϵ = 1 {displaystyle A=1-e^{-GE}qquad epsilon =1} Note that the generalized entropy index has several income inequality metrics as special cases. For example, GE(0) is the mean log deviation, GE(1) is the Theil index, and GE(2) is half the squared coefficient of variation.