Pareto distribution of income in neoclassical growth models

Nirei, Makoto; Aoki, Shuhei

doi:10.1016/j.red.2015.11.002

Cited by 62 publications

(39 citation statements)

References 43 publications

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“…But the scope of our approach is broader, and can be generalized to other stochastic models of socioeconomic dynamics: in Appendix B we apply the fluctuation theorem to a model of (biased) trade and find an upper bound on the so-called Theil inequality index. Our results are complementary to earlier findings which showed that high interest rates (for given growth rate) generate fat-tailed, Pareto-like equilibrium distributions [4][5][6][7][9][10][11][12][13][14]. In particular, they throw light on the question: how will the economic system "respond" to a perturbation?…”

Section: Resultssupporting

confidence: 62%

Thermodynamics of inequalities: From precariousness to economic stratification

Smerlak

2016

Physica A: Statistical Mechanics and its Applications

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Growing economic inequalities are observed in several countries throughout the world. Following Pareto, the power-law structure of these inequalities has been the subject of much theoretical and empirical work. But their nonequilibrium dynamics, e.g. after a policy change, remains incompletely understood. Here we introduce a thermodynamical theory of inequalities based on the analogy between economic stratification and statistical entropy. Within this framework we identify the combination of upward mobility with precariousness as a fundamental driver of inequality. We formalize this statement by a "second-law" inequality displaying upward mobility and precariousness as thermodynamic conjugate variables. We estimate the time scale for the "relaxation" of the wealth distribution after a sudden change of the after-tax return on capital. Our method can be generalized to gain insight into the dynamics of inequalities in any Markovian model of socioeconomic interactions.1 Dating back to paleolithic hunter-gatherers [1].

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Section: Resultssupporting

confidence: 62%

Thermodynamics of inequalities: From precariousness to economic stratification

Smerlak

2016

Physica A: Statistical Mechanics and its Applications

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“…15 For instance, it is messy to define a reflecting barrier in the presence of jumps. 16 See, for example, Champernowne (1953), Simon (1955), Nirei (2009), Toda and Walsh (2015), Aoki and Nirei (2015), Kim (2015), Jones andKim (2014), andLuttmer (2015) for models with similar reduced forms. Some of these are derived from individual optimization, but others are not.…”

Section: Income Dynamicsmentioning

confidence: 99%

“…A large theoretical literature builds on random growth processes to theorize about the upper tails of income and wealth distributions. Early theories of the income distribution include Champernowne (1953) and Simon (1955), with more recent contributions by Nirei (2009), Toda and Walsh (2015), Kim (2015), Jones and Kim (2014), and Luttmer (2015). Similarly, random growth theories of the wealth distribution include Wold and Whittle (1957) and, more recently, Benhabib, Bisin, and Zhu (2011, Jones (2015), and Acemoglu and Robinson (2015).…”

Section: Introductionmentioning

confidence: 99%

The Dynamics of Inequality

Gabaix¹,

Lasry²,

Lions³

et al. 2016

Econometrica

327

271

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The past forty years have seen a rapid rise in top income inequality in the United States. While there is a large number of existing theories of the Pareto tail of the long‐run income distributions, almost none of these address the fast rise in top inequality observed in the data. We show that standard theories, which build on a random growth mechanism, generate transition dynamics that are too slow relative to those observed in the data. We then suggest two parsimonious deviations from the canonical model that can explain such changes: “scale dependence” that may arise from changes in skill prices, and “type dependence,” that is, the presence of some “high‐growth types.” These deviations are consistent with theories in which the increase in top income inequality is driven by the rise of “superstar” entrepreneurs or managers.

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“…There is also an extensive theoretical literature that considers the implications of both uninsurable labor income risk and uninsurable capital income risk in different macroeconomic settings. In a simple Solow growth model setting, for example, Nirei (2009) shows that introducing uninsurable investment risk yields a realistic Pareto distribution for top income and wealth shares. Jones and Kim (2014) consider a model in which entrepreneurs face heterogeneous shocks to their human capital and corresponding income, and then examine the implications of different technological and policy shocks in this setting.…”

Section: Introductionmentioning

confidence: 99%

A Statistical Model of Inequality

Fernholz

2016

SSRN Journal

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This paper develops a nonparametric statistical model of wealth distribution that imposes little structure on the fluctuations of household wealth. In this setting, we use new techniques to obtain a closed-form household-by-household characterization of the stable distribution of wealth and show that this distribution is shaped entirely by two factors-the reversion rates (a measure of cross-sectional mean reversion) and idiosyncratic volatilities of wealth across different ranked households. By estimating these factors, our model can exactly match the U.S. wealth distribution. This provides information about the current trajectory of inequality as well as estimates of the distributional effects of progressive capital taxes. We find evidence that the U.S. wealth distribution might be on a temporarily unstable trajectory, thus suggesting that further increases in top wealth shares are likely in the near future. For capital taxes, we find that a small tax levied on just 1% of households substantially reshapes the distribution of wealth and reduces inequality.JEL Codes: E21, C14, D31

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Pareto distribution of income in neoclassical growth models

Cited by 62 publications

References 43 publications

Thermodynamics of inequalities: From precariousness to economic stratification

Thermodynamics of inequalities: From precariousness to economic stratification

The Dynamics of Inequality

A Statistical Model of Inequality

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