Evaluating Theories of Income Dynamics: A Probabilistic Approach
AbstractThe paper proposes an approach to evaluate hypotheses about transition dynamics when only the distributions at two points in time are observed. Using principles of statistical mechanics, we show how to adjust in the "most probable" way a hypothesis such that it becomes compatible with the observed distributions. This adjustment procedure also allows to test hypotheses in a statistical sense. The test is based on the relative entropy and is equivalent to a likelihood ratio test. We apply our approach to compare the dynamics of the income distribution between men and women in the U.S. using PSID data.
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Bibliographic InfoPaper provided by Universitaet Bern, Departement Volkswirtschaft in its series Diskussionsschriften with number dp9905.
Date of creation: Jun 1999
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More information through EDIRC
income dynamics; large deviation; relative entropy; misspecification;
Find related papers by JEL classification:
- C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
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