Shapley inequality decomposition by factor components: Some methodological issues

Decomposition analysis provides help in the difficult task of explaining how economies trends and government policies affect the distribution of income. In this context, recent studies have proposed the application of the “Shapley Value” allocation method, a concept from cooperative game theory, to the decomposition of inequality. This paper examines the “Shapley inequality decomposition” by factor components focussing in particular on some methodological issues that cannot be solved from a theoretical point of view. Following an inductive approach, the empirical evidence obtained by applying several variants of the Shapley decomposition to the UK and US income distributions suggests an answer to some of the dilemmas faced by applied economists when implementing the Shapley decomposition technique. Copyright Springer-Verlag 2002