Evaluating Theories of the Income Dynamics: A Probabilistic Approach

Aebi, Robert; Neusser, Klaus and Steiner, Peter (February 1999) Evaluating Theories of the Income Dynamics: A Probabilistic Approach. Former Series > Working Paper Series > IHS Economics Series 61


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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.;

Item Type: IHS Series
Keywords: 'Transition matrices' 'Large deviation' 'Relative entropy' 'Income dynamics'
Classification Codes (e.g. JEL): J30, C10
Date Deposited: 26 Sep 2014 10:36
Last Modified: 26 Sep 2019 16:48
URI: https://irihs.ihs.ac.at/id/eprint/1136

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