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A Two Factor Model Of Income Distribution Dynamics

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Author Info
Makoto Nirei
Wataru Souma

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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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File URL: http://www.blackwell-synergy.com/links/doi/10.1111/j.1475-4991.2007.00242.x/enhancedabs
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Publisher Info
Article provided by Blackwell Publishing 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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  1. Jess Benhabib & Alberto Bisin, 2006. "The distribution of wealth and redistributive policies," Levine's Working Paper Archive 122247000000001162, David K. Levine. [Downloadable!]
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  2. Fabio Clementi & Mauro Gallegati, 2005. "Pareto's Law of Income Distribution: Evidence for Grermany, the United Kingdom, and the United States," Microeconomics 0505006, EconWPA. [Downloadable!]
    Other versions:
  3. Yi Wen, 2009. "When does heterogeneity matter?," Working Papers 2009-024, Federal Reserve Bank of St. Louis. [Downloadable!]
  4. Fabio Clementi & Mauro Gallegati, 2005. "Power Law Tails in the Italian Personal Income Distribution," Microeconomics 0505005, EconWPA. [Downloadable!]
    Other versions:
  5. Wright, Ian, 2009. "Implicit Microfoundations for Macroeconomics," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 3(19), pages 1-27. [Downloadable!]
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