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Improving Models of Income Dynamics using Cross-Section-Information

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  • Robert Aebi
  • Klaus Neusser
  • Peter Steiner

Abstract

Based on a relative entropy approach, this paper proposes a method to estimate or update transition matrices using just cross-sectional observations at two points in time. The method is then applied to explain the development of the US income distribution. Starting from three hypothesized transition matrices and a transition matrix estimated from the PSID data, we show how these matrices must be adjusted in the light of the cross-sectional information. Finally, we explore the consequences of these updated transition matrices for the future development of the US income distribution.

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Bibliographic Info

Article provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.

Volume (Year): 144 (2008)
Issue (Month): II (June)
Pages: 117-151

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Handle: RePEc:ses:arsjes:2008-ii-1

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Related research

Keywords: income distribution; income dynamics; relative entropy;

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References

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  1. Adelman, Irma & Morley, Samuel & Schenzler, Christoph & Warning, Matthew, 1994. "Estimating income mobility from census data," Journal of Policy Modeling, Elsevier, vol. 16(2), pages 187-213, April.
  2. Robert Aebi & Klaus Neusser & Peter Steiner, 2005. "A Large Deviation Approach to the Measurement of Mobility," Diskussionsschriften dp0518, Universitaet Bern, Departement Volkswirtschaft.
  3. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
  4. Robert Aebi & Klaus Neusser & Peter Steiner, 1999. "Evaluating Theories of Income Dynamics: A Probabilistic Approach," Diskussionsschriften dp9905, Universitaet Bern, Departement Volkswirtschaft.
  5. Golan, Amos & Judge, George G. & Miller, Douglas, 1996. "Maximum Entropy Econometrics," Staff General Research Papers 1488, Iowa State University, Department of Economics.
  6. White,Halbert, 1996. "Estimation, Inference and Specification Analysis," Cambridge Books, Cambridge University Press, number 9780521574464, April.
  7. Burkhauser, Richard V, et al, 1999. "Testing the Significance of Income Distribution Changes over the 1980s Business Cycle: A Cross-National Comparison," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(3), pages 253-72, May-June.
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Cited by:
  1. Erik Alencar de Figueirêdo & José Luis da Silva Netto Junior & Sabino da Silva Pôrto Junior, 2007. "Distribuição, Mobilidade e Polarização de Renda no Brasil: 1987 a 2003," Revista Brasileira de Economia, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 61(1), pages 7-32, August.
  2. Erik Figueiredo & Flávio Ziegelmann, 2010. "The dynamics of the Brazilian income," Economics Bulletin, AccessEcon, vol. 30(2), pages 1249-1260.

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