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From a stochastic model of economic exchange to measures of inequality

Author

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  • Dashti Moghaddam, M.
  • Mills, Jeffrey
  • Serota, R.A.

Abstract

This paper connects the Generalized Beta 2 distribution with a plausible stochastic model of economic exchange (Hertzler, 2003). The GB2 is the steady-state equilibrium distribution of this model of exchange which, along with unique properties of the GB2, provides an explanation for its success in describing both income and wealth distributions, and financial market volatility. This brings about a better understanding of the parametric dependencies of the distribution and quantities derived from it, such as the Gini, Hoover and Theil inequality measures. Our examination of the properties of these measures in relation to the GB2 motivates the proposal of an alternative measure of inequality which is less prone to extremes stemming from the fat tails of the GB2. Maximum likelihood estimation methods are applied to housing sales prices as an application and to validate more accurate measures of goodness of fit, such as Kolmogorov–Smirnov statistic.

Suggested Citation

  • Dashti Moghaddam, M. & Mills, Jeffrey & Serota, R.A., 2020. "From a stochastic model of economic exchange to measures of inequality," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 559(C).
    • Handle: RePEc:eee:phsmap:v:559:y:2020:i:c:s0378437120305483
    DOI: 10.1016/j.physa.2020.125047
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    References listed on IDEAS

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