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Investment Talent and the Pareto Wealth Distribution: Theoretical and Experimental Analysis

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  • Moshe Levy

    (The Hebrew University of Jerusalem)

  • Haim Levy

    (The Hebrew University of Jerusalem)

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    Abstract

    The empirically documented Pareto wealth distribution at high wealth levels implies rather extreme wealth inequality. Is this inequality primarily due to differential talent, or is it due to luck? The answer to this question has profound political, social, and philosophical implications, as well as implications regarding market efficiency. We address this question theoretically and with a unique investment experiment with equal initial endowments and real out-of-pocket money. We show that the empirically observed Pareto distribution implies that luck, rather than differential investment talent, is the main force driving inequality at high wealth levels. © 2003 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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    Bibliographic Info

    Article provided by MIT Press in its journal Review of Economics and Statistics.

    Volume (Year): 85 (2003)
    Issue (Month): 3 (August)
    Pages: 709-725

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    Handle: RePEc:tpr:restat:v:85:y:2003:i:3:p:709-725

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    Cited by:
    1. Ibragimov, Marat & Ibragimov, Rustam & Kattuman, Paul, 2013. "Emerging markets and heavy tails," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2546-2559.
    2. repec:wii:bpaper:bowp:088 is not listed on IDEAS
    3. Rustam Ibragimov & Marat Ibragimov & Rufat Khamidov, 2010. "Measuring Inequality in CIS Countries: Theory and Empirics," wiiw Balkan Observatory Working Papers 88, The Vienna Institute for International Economic Studies, wiiw.
    4. Ogwang, Tomson, 2013. "Is the wealth of the world’s billionaires Paretian?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(4), pages 757-762.
    5. Takashi Kamihigashi & John Stachurski, 2013. "Stochastic Stability in Monotone Economies," Discussion Paper Series DP2013-02, Research Institute for Economics & Business Administration, Kobe University.
    6. Tomson Ogwang, 2011. "Power laws in top wealth distributions: evidence from Canada," Empirical Economics, Springer, vol. 41(2), pages 473-486, October.
    7. Campante, Filipe R., 2011. "Redistribution in a model of voting and campaign contributions," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 646-656, August.
    8. Thomas Goda, 2014. "Global trends in relative and absolute wealth concentrations," DOCUMENTOS DE TRABAJO CIEF 010897, UNIVERSIDAD EAFIT.

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