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Economic Arbitrage and the Econophysics of Income Inequality

Author

Listed:
  • Anwar Shaikh

    (Department of Economics, New School for Social Research)

  • Juan Esteban Jacobo

    (Department of Economics, New School for Social Research and Departamento de Economía, Universidad Externado de Colombia)

Abstract

Yakovenko and his co-authors have established that the bottom 97-99 percent of individual incomes (labor incomes) follow a near-exponential distribution while the top incomes (property incomes) follow a power law. Traditional econophysics explanations of these patterns rely on various monetary analogues to the physics principle of energy conservation. We turn instead to the fundamental economic principle of turbulent arbitrage, modeled as a mean-reverting drift-diffusion process, to explain the observed distributions of wages, rates of return on assets, and property income. Entropy maximization plays different roles in two approaches. In the physics approach, stationary distributions are derived from the assumption of entropy maximization. In the economics approach, the dynamic paths generated by Fokker-Planck equations give rise to stationary distributions that turn out to be also entropy maximizing.

Suggested Citation

  • Anwar Shaikh & Juan Esteban Jacobo, 2019. "Economic Arbitrage and the Econophysics of Income Inequality," Working Papers 1902, New School for Social Research, Department of Economics.
    • Handle: RePEc:new:wpaper:1902
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    References listed on IDEAS

    as
    1. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 5, pages 129-164, World Scientific Publishing Co. Pte. Ltd..
    2. Shaikh, Anwar, 2016. "Capitalism: Competition, Conflict, Crises," OUP Catalogue, Oxford University Press, number 9780199390632.
    3. Anand Banerjee & Victor M. Yakovenko, 2009. "Universal patterns of inequality," Papers 0912.4898, arXiv.org, revised Apr 2010.
    4. Shaikh, Anwar & Papanikolaou, Nikolaos & Wiener, Noe, 2014. "Race, gender and the econophysics of income distribution in the USA," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 415(C), pages 54-60.
    5. Victor M. Yakovenko, 2003. "Research in Econophysics," Papers cond-mat/0302270, arXiv.org, revised Mar 2003.
    6. Xavier Gabaix, 2009. "Power Laws in Economics and Finance," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 255-294, May.
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    9. A. Drăgulescu & V.M. Yakovenko, 2001. "Evidence for the exponential distribution of income in the USA," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 20(4), pages 585-589, April.
    10. Makoto Nirei & Wataru Souma, 2007. "A Two Factor Model Of Income Distribution Dynamics," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 53(3), pages 440-459, September.
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    12. A. Christian Silva & Victor M. Yakovenko, 2004. "Temporal evolution of the "thermal" and "superthermal" income classes in the USA during 1983-2001," Papers cond-mat/0406385, arXiv.org, revised Oct 2004.
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    Cited by:

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    More about this item

    Keywords

    Economics; arbitrage; econophysics; income distribution; classical statistical mechanics;
    All these keywords.

    JEL classification:

    • B12 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Classical (includes Adam Smith)
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution

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