Global inequality: How large is the effect of top incomes?

In this paper, we estimate the recent evolution of global interpersonal inequality and examine the effect of omitted top incomes on the level and direction of global inequality. We propose a methodology to estimate the truncation point of household surveys by combining information on income shares from household surveys and top income shares from tax data. The methodology relies on a flexible parametric functional form that models the income distribution for each country-year point under different assumptions on the omitted information at the right tail of the distribution. Goodness-of-fit results show a robust performance of our model, supporting the reliability of our estimates. Overall, we find that the undersampling of the richest individuals in household surveys generate a downward bias in global inequality estimates that ranges between 15 per cent and 42 per cent, depending on the period of analysis, and the assumed level of truncation of the income distribution.