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A Continuous-Time Model of Income Dynamics

Author

Listed:
  • Thorsten Heimann

    (Westfälische Wilhelms-Universität Münster)

  • Mark Trede

    (Westfälische Wilhelms-Universität Münster)

Abstract

Most models of income dynamics are set in a discrete-time framework with an arbitrarily chosen accounting period. This article introduces a continuous-time stochastic model of income flows, without the need to define an accounting period. Our model can be estimated using unbalanced panel data with arbitrarily spaced observations. Although our model describes the stochastic properties of income flows, estimation is based on observed incomes accruing during time intervals of possibly varying length. Our model of income dynamics is close in spirit to the discrete-time two-stage models prevalent in the literature. We impose a parsimoniously parameterized continuous-time stochastic process (possibly containing a unit root) to model the deviation from a traditional earnings function. We illustrate our approach by estimating a simplified model using microeconomic data from the German social security agency from 1975 1995.

Suggested Citation

  • Thorsten Heimann & Mark Trede, 2011. "A Continuous-Time Model of Income Dynamics," Journal of Income Distribution, Ad libros publications inc., vol. 20(1), pages 29-48, March.
    • Handle: RePEc:jid:journl:y:2011:v:20:i:1:p:29-48
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    File URL: http://pi.library.yorku.ca/ojs/index.php/jid/article/view/22724
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    Citations

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    Cited by:

    1. Wei-Bin ZHANG, 2014. "Gender Discrimination, Education and Economic Growth in a Generalized Uzawa-Lucas Two-Sector Model," Timisoara Journal of Economics and Business, West University of Timisoara, Romania, Faculty of Economics and Business Administration, vol. 7(1), pages 1-34.
    2. Wei-Bin Zhang, 2016. "Gender-Differentiated Human Capital And Time Distributions In A Generalized Heckscher-Ohlin Model With Endogenous Physical Capital," Knowledge Horizons - Economics, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 8(2), pages 112-132, June.

    More about this item

    Keywords

    earnings; diffusion process; Ornstein-Uhlenbeck process; panel data; estimation;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J62 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Job, Occupational and Intergenerational Mobility; Promotion

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