In this paper we develop a decomposition of Spanish income inequality by factor components. The methodology we adopt is based on the Shapley value. This is a concept coming from the co-operative game literature that allow us to overcome some of the drawbacks present in the existing inequality decomposition approaches. The empirical exercise is carried out using data from the 1994 Spanish Income Panel of the “Instituto de Estudios Fiscales”. The main results show that taxes and transfers significantly reduce the inequality of capital and wage incomes. These results are also compared with the income decomposition proposed in Shorrocks (1982) and with the factorial decomposition using the Gini coefficient (Fei, Ranis and Kuo 1978).

Key words: inequality, decomposition, Shapley value, Spanish Income Panel.
JEL classification: D63, C71.