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Pareto versus lognormal: a maximum entropy test

Marco Bee, Massimo Riccaboni () and Stefano Schiavo

No 1102, Department of Economics Working Papers from Department of Economics, University of Trento, Italia

Abstract: It is commonly found that distributions that seem to be lognormal over a broad range change to a power-law (Pareto) distribution for the last few percentiles. The distributions of species abundance, income and wealth as well as file, city and firm sizes are examples with this structure. We present a new test for the occurrence of power-law tails in statistical distributions based on maximum entropy. This methodology allows to identify the true data generating processes even in the case when it is neither lognormal nor Pareto. The maximum entropy approach is then compared with alternative methods at different levels of aggregation of economic systems. Our results provide support to the theory that distributions with lognormal body and Pareto tail can be generated as mixtures of lognormally distributed units.

Keywords: Pareto distribution; power-law; lognormal distribution; maximum entropy; firm size; international trade (search for similar items in EconPapers)
JEL-codes: C14 C51 C52 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-ecm
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