Composite pareto distributions for modelling household income distribution in Malaysia

Abstract

Composite Pareto distributions are flexible as the models allow for data to be described by two distributions: a Pareto distribution for the data above a threshold value and another separate distribution for data below the threshold value. It is noted in some previous literatures that the Paretian tail behaviour can be observed in the distribution of Malaysian household income. In this paper, the composite Pareto models are fitted to the Malaysian household income data of several years. These fitted composite Pareto models are then compared to several univariate models for describing income distribution using pseudo-likelihood based AIC, BIC and Kolmogorov-Smirnov goodness-of-fit test. It is found that the income distributions in Malaysia can be best described by the lognormal-Pareto (II) model as compared to other candidate models.