From the Classical Gini Index of Income Inequality to a New Zenga-Type Relative Measure of Risk: A Modeller’s Perspective

Abstract

The underlying idea behind the construction of indices of economic inequality is based on measuring deviations of various portions of low incomes from certain references or benchmarks, which could be point measures like the population mean or median, or curves like the hypotenuse of the right triangle into which every Lorenz curve falls. In this paper, we argue that, by appropriately choosing population-based references (called societal references) and distributions of personal positions (called gambles, which are random), we can meaningfully unify classical and contemporary indices of economic inequality, and various measures of risk. To illustrate the herein proposed approach, we put forward and explore a risk measure that takes into account the relativity of large risks with respect to small ones.

Keywords

• economic inequality
• reference measure
• personal gamble
• inequality index
• risk measure
• relativity