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  • Somnath Chattopadhyay

    Corresponding author
    1. Indian Statistical Institute, Kolkata
    • Correspondence: Somnath Chattopadhyay, Economic Research Unit, Indian Statistical Institute, 203 B. T. Road, Kolkata 700108, India. Tel: +919830313902; Fax: 91-33-25778893; Email:

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  • The author is grateful to Prof. Amita Majumder and Mr Sattwik Santra of the Indian Statistical Institute, Kolkata for the help and guidance offered in writing this paper. Comments from an anonymous referee are greatly appreciated.


The paper introduces the concept of an earnings frontier in explaining monthly consumption expenditure (a proxy for income) in terms of human capital and endowments of a household. Individuals who translate their potential earning into actual earnings enjoy a fully efficient position. In contrast, individuals who earn less than their potential earnings suffer from some kind of earnings inefficiency. The paper estimates an earnings frontier using the Corrected Ordinary Least Square (COLS) method and classifies households in terms of efficiency scores. Splitting the sample into an efficient and an inefficient part based on the estimated frontier and a bench mark efficiency score, the status of poverty in the two parts (groups) is studied. The poverty gap between the groups is then decomposed into a characteristics effect and a coefficients effect using the familiar Oaxaca decomposition methodology. The paper also tries to establish a link between the notion of efficiency and the coefficients effect in the Oaxaca decomposition methodology. The results obtained are interpreted in light of the poor but efficient hypothesis.