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Pareto models for top incomes and wealth

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  • Arthur Charpentier

    (Université du Québec à Montréal (UQAM))

  • Emmanuel Flachaire

    (AMSE, CNRS and EHESS)

Abstract

Top incomes are often related to Pareto distribution. To date, economists have mostly used Pareto Type I distribution to model the upper tail of income and wealth distribution. It is a parametric distribution, with interesting properties, that can be easily linked to economic theory. In this paper, we first show that modeling top incomes with Pareto Type I distribution can lead to biased estimation of inequality, even with millions of observations. Then, we show that the Generalized Pareto distribution and, even more, the Extended Pareto distribution, are much less sensitive to the choice of the threshold. Thus, they can provide more reliable results. We discuss different types of bias that could be encountered in empirical studies and, we provide some guidance for practice. To illustrate, two applications are investigated, on the distribution of income in South Africa in 2012 and on the distribution of wealth in the United States in 2013.

Suggested Citation

  • Arthur Charpentier & Emmanuel Flachaire, 2022. "Pareto models for top incomes and wealth," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 20(1), pages 1-25, March.
    • Handle: RePEc:spr:joecin:v:20:y:2022:i:1:d:10.1007_s10888-021-09514-6
    DOI: 10.1007/s10888-021-09514-6
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    6. Frederico Caeiro & Ayana Mateus, 2023. "A New Class of Generalized Probability-Weighted Moment Estimators for the Pareto Distribution," Mathematics, MDPI, vol. 11(5), pages 1-17, February.

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