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Explosive earnings dynamics: Whoever has will be given more

Author

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  • Sarah Meyer
  • Mark Trede

Abstract

This paper suggests a model of explosive earnings dynamics where positive deviations tend to increase the growth rate even further. This "Matthew effect" can explain a number of empirical regularities. First, we show that the explosive model might resemble a model with heterogeneous earnings profiles in terms of its covariance structure. Second, we derive the optimal consumption and savings behaviour under explosiveness and compare it to other models. Third, we present a panel test against explosiveness and apply it to German and U.S. earnings data. We find that the null hypothesis of no explosiveness can be rejected. However, the proportion of explosive profiles is small.

Suggested Citation

  • Sarah Meyer & Mark Trede, 2016. "Explosive earnings dynamics: Whoever has will be given more," CQE Working Papers 4716, Center for Quantitative Economics (CQE), University of Muenster.
    • Handle: RePEc:cqe:wpaper:4716
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    File URL: https://www.wiwi.uni-muenster.de/cqe/sites/cqe/files/CQE_Paper/CQE_WP_47_2016.pdf
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    References listed on IDEAS

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    Cited by:

    1. Jeanne Diesteldorf & Sarah Meyer & Jan Voelzke, 2016. "New evidence for explosive behavior of commodity prices," CQE Working Papers 5016, Center for Quantitative Economics (CQE), University of Muenster.

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    More about this item

    Keywords

    labour income; idiosyncratic risk; explosive stochastic processes;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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