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Explosive earnings dynamics: Whoever has will be given more

Sarah Meyer and Mark Trede ()

No 4716, CQE Working Papers from Center for Quantitative Economics (CQE), University of Muenster

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.

Keywords: labour income; idiosyncratic risk; explosive stochastic processes (search for similar items in EconPapers)
JEL-codes: J31 D91 C33 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2016-04
New Economics Papers: this item is included in nep-pr~
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