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Income Distribution among Individuals: The effects of economic interactions

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  • ARATA Yoshiyuki
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    Abstract

    Income distribution (except for very high incomes) is widely understood to be well described by a log-normal distribution. Existing research has modeled an individual's income as an independent stochastic process to explain the observed log-normality. In this paper, I propose a stochastic model whereby an individual's income is not independent, but instead depends crucially on the incomes of other members of the economy. The model clarifies how the effects of economic interactions work. It turns out that they are favorable toward the wealthy as they enable them to keep their status with high probability. This represents a universal structure of economic systems.

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    File URL: http://www.rieti.go.jp/jp/publications/dp/13e042.pdf
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    Bibliographic Info

    Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 13042.

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    Length: 9 pages
    Date of creation: May 2013
    Date of revision:
    Handle: RePEc:eti:dpaper:13042

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    1. Xavier Gabaix, 1999. "Zipf'S Law For Cities: An Explanation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 739-767, August.
    2. Sahota, Gian Singh, 1978. "Theories of Personal Income Distribution: A Survey," Journal of Economic Literature, American Economic Association, vol. 16(1), pages 1-55, March.
    3. Levy, Moshe, 2003. "Are rich people smarter?," Journal of Economic Theory, Elsevier, vol. 110(1), pages 42-64, May.
    4. Maxim Pinkovskiy & Xavier Sala-i-Martin, 2009. "Parametric Estimations of the World Distribution of Income," NBER Working Papers 15433, National Bureau of Economic Research, Inc.
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