Entropic basis of the Pareto law

Philip K. Rawlings, David Reguera and Howard Reiss

Physica A: Statistical Mechanics and its Applications, 2004, vol. 343, issue C, 643-652

Abstract: Based on the assumption that certain economies achieve quasi-equilibrium, an appropriate economic statistical thermodynamics is formulated in which entropy emerges naturally. Under the assumption that the small group of high income agents, whose income distribution satisfies Pareto's law, does not much interact with the larger group of lower income agents, the corresponding statistical thermodynamic relations are applied in order to derive the Pareto law. The derivation requires the assumption that the sum of logarithms of the incomes of the individual agents (or the product of incomes) in this group is conserved. A strong plausibility argument for this assumption is presented. It also turns out (in accordance with intuition) that in order to increase the average income of an agent more “risk” in the form of greater entropy production must be assumed. Other consequences are discussed, and an experimental demonstration of the uniformity of economic temperature in a system, at economic equilibrium, is presented.

Keywords: Economic entropy; Economic temperature; Thermodynamics; Income distribution; Economic equilibrium (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:343:y:2004:i:c:p:643-652

DOI: 10.1016/j.physa.2004.06.152

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