Economic Arbitrage and the Econophysics of Income Inequality

Anwar Shaikh () and Juan Jacobo ()

No 1902, Working Papers from New School for Social Research, Department of Economics

Abstract: Yakovenko and his co-authors have established that the bottom 97-99 percent of individual incomes (labor incomes) follow a near-exponential distribution while the top incomes (property incomes) follow a power law. Traditional econophysics explanations of these patterns rely on various monetary analogues to the physics principle of energy conservation. We turn instead to the fundamental economic principle of turbulent arbitrage, modeled as a mean-reverting drift-diffusion process, to explain the observed distributions of wages, rates of return on assets, and property income. Entropy maximization plays different roles in two approaches. In the physics approach, stationary distributions are derived from the assumption of entropy maximization. In the economics approach, the dynamic paths generated by Fokker-Planck equations give rise to stationary distributions that turn out to be also entropy maximizing.

Keywords: Economics; arbitrage; econophysics; income distribution; classical statistical mechanics (search for similar items in EconPapers)
Pages: 13 pages
Date: 2019-02
New Economics Papers: this item is included in nep-hme and nep-hpe
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Citations: View citations in EconPapers (2)

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http://www.economicpolicyresearch.org/econ/2019/NSSR_WP_022019.pdf First version, 2019 (application/pdf)

Related works:
Journal Article: Economic Arbitrage and the Econophysics of Income Inequality (2020)
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