A: I can't seem to shake off this tired feeling. Guess I'm just getting old. [Age effect]
B: Do you think it's stress? Business is down this year, and you've let your fatigue build up. [Period effect]
A: Maybe. What about you?
B: Actually, I'm exhausted too! My body feels really heavy.
A: You're kidding. You're still young. I could work all day long when I was your age.
B: Oh, really?
A: Yeah, young people these days are quick to whine. We were not like that. [Cohort effect]
The year you are in equals your year of birth plus your age: the three effects are linearly dependent. Therefore, it is fundamentally impossible to directly estimate the age, period and cohort effects on a dependent variable (such as tiredness) in a standard regression, Social scientists in different fields have tried to tackle the APC model in different ways. I present Browning et al’s Maximum Entropy method and apply it to disentangle the three effects on income inequality within cohorts in the US. I then discuss how to link this to overall cross sectional inequality. This is part of my M.Phil thesis in Economics, supervised by Eric Beinhocker and Ian Crawford.