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  • Open Access

Improving Models of Income Dynamics Using Cross-Section-Information

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Swiss Journal of Economics and Statistics2008144:BF03399251

https://doi.org/10.1007/BF03399251

  • Published:

Summary

Based on a relative entropy approach, this paper proposes a method to estimate or update transition matrices using just cross-sectional observations at two points in time. The method is then applied to explain the development of the US income distribution. Starting from three hypothesized transition matrices and a transition matrix estimated from the PSID data, we show how these matrices must be adjusted in the light of the cross-sectional information. Finally, we explore the consequences of these updated transition matrices for the future development of the US income distribution.

Keywords

  • income distribution
  • income dynamics
  • relative entropy

Notes

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