Correcting the bias in the concentration index when income is grouped

  • Philip Clarke Philip Clarke
  • Tom Van Ourti Tom Van Ourti

The problem introduced by grouping income data when measuring socioeconomic inequalities in health (and health care) has been highlighted in a recent study in this journal. We re-examine this issue and show there is a tendency to underestimate the concentration index at an increasing rate when lowering the number of incomecategories. This bias results from a form of measurement error and we propose two correction methods. Firstly, the use of instrumental variables (IV) can reduce the error within income categories. Secondly, through a simple formula for correction that isbased only on the number of groups. We compare the performance of these methods using data from 15 European countries and the United States. We find that the simple correction formula reduces the impact of grouping and always outperforms the IV approach. Use of this correction can substantially improve comparisons of the concentration index both across countries and across time.

Netspar, Network for Studies on Pensions, Aging and Retirement, is a thinktank and knowledge network. Netspar is dedicated to promoting a wider understanding of the economic and social implications of pensions, aging and retirement in the Netherlands and Europe.

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