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Evaluating Theories of the Income Dynamics: A Probabilistic Approach

Author

Listed:
  • Aebi, Robert

    (Institute for Mathematical Statistic, University of Berne)

  • Neusser, Klaus

    (Department of Economics, University of Berne)

  • Steiner, Peter

    (Department of Economics, University of Berne)

Abstract

The paper proposes an approach to evaluate hypotheses about transition dynamics when only the distributions at two points in time are observed. Using the principle of statistical mechanics, we show how to adjust in the "most probable" way a hypothesis so 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.

Suggested Citation

  • Aebi, Robert & Neusser, Klaus & Steiner, Peter, 1999. "Evaluating Theories of the Income Dynamics: A Probabilistic Approach," Economics Series 61, Institute for Advanced Studies.
  • Handle: RePEc:ihs:ihsesp:61
    as

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    File URL: http://www.ihs.ac.at/publications/eco/es-61.pdf
    File Function: First version, 1999
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    References listed on IDEAS

    as
    1. Atkinson, A B, 1997. "Bringing Income Distribution in from the Cold," Economic Journal, Royal Economic Society, vol. 107(441), pages 297-321, March.
    2. Durlauf, Steven N. & Quah, Danny T., 1999. "The new empirics of economic growth," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 4, pages 235-308 Elsevier.
    3. Schluter, Christian, 1998. "Statistical inference with mobility indices," Economics Letters, Elsevier, vol. 59(2), pages 157-162, May.
    4. Trede, Mark M., 1994. "Statistical inference in mobility measurement: Sex differences in earnings mobility," Discussion Papers in Econometrics and Statistics 4/94, University of Cologne, Institute of Econometrics and Statistics.
    5. Shorrocks, A F, 1978. "The Measurement of Mobility," Econometrica, Econometric Society, vol. 46(5), pages 1013-1024, September.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Erik Figueiredo & Flávio Ziegelmann, 2010. "The dynamics of the Brazilian income," Economics Bulletin, AccessEcon, vol. 30(2), pages 1249-1260.

    More about this item

    Keywords

    Transition matrices; Large deviation; Relative entropy; Income dynamics;

    JEL classification:

    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General

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