Key Takeaways:

- The Dagum distribution is a way to model wealth distribution.
- When applied to empirical data, the Dagum outperforms the Pareto and lognormal distributions.
- Options include three and four parameter variants.
The

Dagum distribution(also called theInverse Burr distribution; Dagum called it thegeneralized logistic-Burr distribution) was proposed by Camilo Dagum in the 1970s to model income and wealth.Dagum developed the models as an alternative to the Pareto Distribution and lognormal distribution, which he felt didn’t result in accurate models when applied to spread of income. More specifically, Dagum wasn’t satisfied with how the Pareto and lognormal handles

heavy-tailed data. Specifically, he felt a better model could be developed for the heavy tails often found in empirical income and wealth distributions, while allowing for aninterior mode. The Pareto handles heavy tails well, but the lognormal does not. And while the lognormal allows an interior mode (or a mode at zero), the Pareto doesn’t. Dagum’s distribution allows for an interior modeandit handles heavy tails (Kleiber, 2007).Despite its relative unpopularity, the Dagum distribution

often performs betterthan other two/three parameter income/wealth distribution models when applied to empirical data.## Dagum Distribution CDF and PDF

The CDF of the Type I (three parameter) Dagum distribution is:

The PDF is:

Where:

- λ = a scale parameter,
- δ and Β = shape parameters.

When Β = 1, the distribution is called the log-logistic distribution.## Types

The three parameter

Dagum Type I distributionevolved from Dagum’s experimentation with a shifted log-logistic distribution (Chotikapanich, 2008). Two four-parameter (Type II) generalizations were also developed.## References

Atkinson, A. (2014). Handbook of Income Distribution, Volume 2. Elsevier.

Chotikapanich, D. (Ed.) (2008). Modeling Income Distributions and Lorenz Curves. Springer Science & Business Media.

Dagum, C., A New Model of Personal Income Distribution: Specification and Estimation,

Economie Appliqueâ€™e, 30, 413 – 437, (1977).

Kleiber, C. & Kotz, S. (2003). Statistical Size Distributions in Economics and Actuarial Sciences. John Wiley & Sons.

Kleiber, C. (2007). A Guide to the Dagum Distributions. Retrieved May 26, 2020 from: http://citeseerx.ist.psu.edu/viewdoc/download;jsessionid=BEE8C9083715B6042596B0DC170BFDA1?doi=10.1.1.610.8346&rep=rep1&type=pdf

# Dagum Distribution: Definition, CDF & PDF

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