- Open Access
Improving Models of Income Dynamics Using Cross-Section-Information
© Swiss Journal of Economics and Statistics 2008
- Published: 2 January 2008
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.
- income distribution
- income dynamics
- relative entropy