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A Two Factor Model Of Income Distribution Dynamics

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  • Makoto Nirei
  • Wataru Souma

Abstract

This paper analyzes empirical income distributions and proposes a simple stochastic model to explain the stationary distribution and deviations from it. Using the individual tax returns data in the U.S. and Japan for 40 years, we first summarize the shape of the income distribution by an exponential decay up to about the 90th percentile and a power decay for the top 1 percent. We then propose a minimal stochastic process of labor and asset income to reproduce the empirical characteristics. In particular, the Pareto exponent is derived analytically and matched with empirical statistics. Copyright � 2007 The Authors; Journal compilation � International Association for Research in Income and Wealth 2007.

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Bibliographic Info

Article provided by International Association for Research in Income and Wealth in its journal Review of Income and Wealth.

Volume (Year): 53 (2007)
Issue (Month): 3 (09)
Pages: 440-459

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Handle: RePEc:bla:revinw:v:53:y:2007:i:3:p:440-459

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