[Journal:] Swiss Journal of Economics and Statistics [ISSN:] 2235-6282 [Volume:] 144 [Year:] 2008 [Issue:] 2 [Pages:] 117-151
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