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Evaluating Theories of the Income Dynamics: A Probabilistic Approach

  • 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)

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.

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Paper provided by Institute for Advanced Studies in its series Economics Series with number 61.

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Length: 20 pages
Date of creation: Feb 1999
Date of revision:
Handle: RePEc:ihs:ihsesp:61
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  1. 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.
  2. Durlauf,S.N. & Quah,D.T., 1998. "The new empirics of economic growth," Working papers 3, Wisconsin Madison - Social Systems.
  3. Shorrocks, A F, 1978. "The Measurement of Mobility," Econometrica, Econometric Society, vol. 46(5), pages 1013-24, September.
  4. Atkinson, A B, 1997. "Bringing Income Distribution in from the Cold," Economic Journal, Royal Economic Society, vol. 107(441), pages 297-321, March.
  5. Schluter, Christian, 1998. "Statistical inference with mobility indices," Economics Letters, Elsevier, vol. 59(2), pages 157-162, May.
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