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Evaluating Theories of Income Dynamics: A Probabilistic Approach

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Author Info

  • Robert Aebi
  • Klaus Neusser
  • Peter Steiner

Abstract

The 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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File URL: http://www.vwl.unibe.ch/papers/dp/dp9905.pdf
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Bibliographic Info

Paper provided by Universitaet Bern, Departement Volkswirtschaft in its series Diskussionsschriften with number dp9905.

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Date of creation: Jun 1999
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Handle: RePEc:ube:dpvwib:dp9905

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Related research

Keywords: income dynamics; large deviation; relative entropy; misspecification;

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References

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  1. Yuichi Kitamura & Michael Stutzer, 1997. "An Information-Theoretic Alternative to Generalized Method of Moments Estimation," Econometrica, Econometric Society, vol. 65(4), pages 861-874, July.
  2. Atkinson, A-B, 1996. "Bringing Income Distribution in from the Cold," Economics Papers 117, Economics Group, Nuffield College, University of Oxford.
  3. Durlauf,S.N. & Quah,D.T., 1998. "The new empirics of economic growth," Working papers 3, Wisconsin Madison - Social Systems.
  4. White, Halbert, 1982. "Maximum Likelihood Estimation of Misspecified Models," Econometrica, Econometric Society, vol. 50(1), pages 1-25, January.
  5. Shorrocks, A F, 1978. "The Measurement of Mobility," Econometrica, Econometric Society, vol. 46(5), pages 1013-24, September.
  6. Golan, Amos & Judge, George G. & Miller, Douglas, 1996. "Maximum Entropy Econometrics," Staff General Research Papers 1488, Iowa State University, Department of Economics.
  7. Schluter, Christian, 1998. "Statistical inference with mobility indices," Economics Letters, Elsevier, vol. 59(2), pages 157-162, May.
  8. Trede, Mark M., 1994. "Statistical inference in mobility measurement: Sex differences in earnings mobility," Discussion Papers in Statistics and Econometrics 4/94, University of Cologne, Department for Economic and Social Statistics.
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Citations

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Cited by:
  1. Robert Aebi & Klaus Neusser & Peter Steiner, 2008. "Improving Models of Income Dynamics using Cross-Section-Information," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 144(II), pages 117-151, June.
  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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