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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
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    File URL: https://irihs.ihs.ac.at/id/eprint/1136
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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. 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.
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    4. 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.
    5. White, Halbert, 1982. "Maximum Likelihood Estimation of Misspecified Models," Econometrica, Econometric Society, vol. 50(1), pages 1-25, January.
    6. Schluter, Christian, 1998. "Statistical inference with mobility indices," Economics Letters, Elsevier, vol. 59(2), pages 157-162, May.
    7. White, Halbert, 1983. "Corrigendum [Maximum Likelihood Estimation of Misspecified Models]," Econometrica, Econometric Society, vol. 51(2), pages 513-513, March.
    8. 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.
    9. Quah, Danny T., 1996. "Empirics for economic growth and convergence," European Economic Review, Elsevier, vol. 40(6), pages 1353-1375, June.
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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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    Keywords

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    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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