IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Power Laws in Economics and Finance

  • Xavier Gabaix

    ()

    (Stern School, New York University, New York, NY 10012)

A power law (PL) is the form taken by a large number of surprising empirical regularities in economics and finance. This review surveys well-documented empirical PLs regarding income and wealth, the size of cities and firms, stock market returns, trading volume, international trade, and executive pay. It reviews detail independent theoretical motivations that make sharp predictions concerning the existence and coefficients of PLs, without requiring delicate tuning of model parameters. These theoretical mechanisms include random growth, optimization, and the economics of superstars, coupled with extreme value theory. Some empirical regularities currently lack an appropriate explanation. This article highlights these open areas for future research.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev.economics.050708.142940
Download Restriction: Full text downloads are only available to subscribers. Visit the abstract page for more information.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Annual Reviews in its journal Annual Review of Economics.

Volume (Year): 1 (2009)
Issue (Month): 1 (05)
Pages: 255-294

as
in new window

Handle: RePEc:anr:reveco:v:1:y:2009:p:255-294
Contact details of provider: Postal: Annual Reviews 4139 El Camino Way Palo Alto, CA 94306, USA
Web page: http://www.annualreviews.org

Order Information: Web: http://www.annualreviews.org/action/ecommerce

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Xavier Gabaix & Augustin Landier, 2008. "Why Has CEO Pay Increased So Much?," The Quarterly Journal of Economics, MIT Press, vol. 123(1), pages 49-100, 02.
  2. Baker, G.P. & Jensen, M.C. & Murphy, K.J., 1988. "Compensation And Incentives: Practice Vs. Theory," Papers 88-05, Rochester, Business - Managerial Economics Research Center.
  3. Parameswaran Gopikrishnan & Vasiliki Plerou & Luis A. Nunes Amaral & Martin Meyer & H. Eugene Stanley, 1999. "Scaling of the distribution of fluctuations of financial market indices," Papers cond-mat/9905305, arXiv.org.
  4. Gilles Duranton, 2007. "Urban Evolutions: The Fast, the Slow, and the Still," American Economic Review, American Economic Association, vol. 97(1), pages 197-221, March.
  5. Fujiwara, Yoshi, 2004. "Zipf law in firms bankruptcy," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 337(1), pages 219-230.
  6. Xavier Gabaix & Parameswaran Gopikrishnan & Vasiliki Plerou & H. Eugene Stanley, 2006. "Institutional Investors and Stock Market Volatility," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 461-504, May.
  7. Esteban Rossi-Hansberg & Mark L.J. Wright, 2005. "Urban Structure and Growth," NBER Working Papers 11262, National Bureau of Economic Research, Inc.
  8. Xavier Gabaix, 2011. "The Granular Origins of Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(3), pages 733-772, 05.
  9. Taisei Kaizoji, 2005. "A Precursor of Market Crashes," Papers physics/0510055, arXiv.org, revised Mar 2006.
  10. J-P. Bouchaud, 2001. "Power laws in economics and finance: some ideas from physics," Quantitative Finance, Taylor & Francis Journals, vol. 1(1), pages 105-112.
  11. Austan Goolsbee & Judith Chevalier, 2002. "Measuring Prices and Price Competition Online: Amazon and Barnes and Noble," NBER Working Papers 9085, National Bureau of Economic Research, Inc.
  12. Atkinson, A. B. & Piketty, Thomas (ed.), 2007. "Top Incomes Over the Twentieth Century: A Contrast Between Continental European and English-Speaking Countries," OUP Catalogue, Oxford University Press, number 9780199286881, March.
  13. Leamer, E. & Levingsohn, J., 1994. "International Trade Theory: The Evidence," Working Papers 368, Research Seminar in International Economics, University of Michigan.
  14. Klass, Oren S. & Biham, Ofer & Levy, Moshe & Malcai, Ofer & Solomon, Sorin, 2006. "The Forbes 400 and the Pareto wealth distribution," Economics Letters, Elsevier, vol. 90(2), pages 290-295, February.
  15. Parameswaran Gopikrishnan & Vasiliki Plerou & Xavier Gabaix & H. Eugene Stanley, 2000. "Statistical Properties of Share Volume Traded in Financial Markets," Papers cond-mat/0008113, arXiv.org.
  16. Xavier Gabaix, 2008. "Variable Rare Disasters: A Tractable Theory of Ten Puzzles in Macro-finance," American Economic Review, American Economic Association, vol. 98(2), pages 64-67, May.
  17. Nirei, Makoto, 2006. "Threshold behavior and aggregate fluctuation," Journal of Economic Theory, Elsevier, vol. 127(1), pages 309-322, March.
  18. Stanley, Michael H. R. & Buldyrev, Sergey V. & Havlin, Shlomo & Mantegna, Rosario N. & Salinger, Michael A. & Eugene Stanley, H., 1995. "Zipf plots and the size distribution of firms," Economics Letters, Elsevier, vol. 49(4), pages 453-457, October.
  19. Marko Tervio, 2008. "The Difference That CEOs Make: An Assignment Model Approach," American Economic Review, American Economic Association, vol. 98(3), pages 642-68, June.
  20. Jansen, Dennis W & de Vries, Casper G, 1991. "On the Frequency of Large Stock Returns: Putting Booms and Busts into Perspective," The Review of Economics and Statistics, MIT Press, vol. 73(1), pages 18-24, February.
  21. Krugman, Paul, 1996. "Confronting the Mystery of Urban Hierarchy," Journal of the Japanese and International Economies, Elsevier, vol. 10(4), pages 399-418, December.
  22. Charles I. Jones, 2004. "The Shape of Production Function and the Direction of Technical Change," NBER Working Papers 10457, National Bureau of Economic Research, Inc.
  23. Joseph Persky, 1992. "Retrospectives: Pareto's Law," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 181-192, Spring.
  24. Eugene F. Fama, 1963. "Mandelbrot and the Stable Paretian Hypothesis," The Journal of Business, University of Chicago Press, vol. 36, pages 420.
  25. Durlauf, Steven N, 1993. "Nonergodic Economic Growth," Review of Economic Studies, Wiley Blackwell, vol. 60(2), pages 349-66, April.
  26. Sorin Solomon & Peter Richmond, 2001. "Power Laws of Wealth, Market Order Volumes and Market Returns," Papers cond-mat/0102423, arXiv.org, revised Apr 2001.
  27. Xavier Gabaix, 1999. "Zipf'S Law For Cities: An Explanation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 739-767, August.
  28. Bak, Per & Chen, Kan & Scheinkman, Jose & Woodford, Michael, 1993. "Aggregate fluctuations from independent sectoral shocks: self-organized criticality in a model of production and inventory dynamics," Ricerche Economiche, Elsevier, vol. 47(1), pages 3-30, March.
  29. Rosen, Sherwin, 1981. "The Economics of Superstars," American Economic Review, American Economic Association, vol. 71(5), pages 845-58, December.
  30. Brock, William A & Durlauf, Steven N, 2001. "Discrete Choice with Social Interactions," Review of Economic Studies, Wiley Blackwell, vol. 68(2), pages 235-60, April.
  31. Challet, Damien & Marsili, Matteo & Zhang, Yi-Cheng, 2004. "Minority Games: Interacting agents in financial markets," OUP Catalogue, Oxford University Press, number 9780198566403, March.
  32. Y Ioannides & Henry Overman, 2000. "Zipfs Law for Cities: An Empirical Examination," CEP Discussion Papers dp0484, Centre for Economic Performance, LSE.
  33. Geoffrey B. West & James H. Brown & Brian J. Enquist, 1997. "A General Model for the Origin of Allometric Scaling Laws in Biology," Working Papers 97-03-019, Santa Fe Institute.
  34. Córdoba, Juan-Carlos, 2008. "On the distribution of city sizes," Journal of Urban Economics, Elsevier, vol. 63(1), pages 177-197, January.
  35. Alex Edmans & Xavier Gabaix & Augustin Landier, 2009. "A Multiplicative Model of Optimal CEO Incentives in Market Equilibrium," Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 4881-4917, December.
  36. Kwok Tong Soo, 2004. "Zipfs Law for Cities: A Cross Country Investigation," CEP Discussion Papers dp0641, Centre for Economic Performance, LSE.
  37. Vasiliki Plerou & Parameswaran Gopikrishnan & Luis. A. Nunes Amaral & Xavier Gabaix & H. Eugene Stanley, 1999. "Economic Fluctuations and Diffusion," Papers cond-mat/9912051, arXiv.org.
  38. Ofer Malcai & Ofer Biham & Peter Richmond & Sorin Solomon, 2002. "Theoretical Analysis and Simulations of the Generalized Lotka-Volterra Model," Papers cond-mat/0208514, arXiv.org.
  39. Tomoya Mori & Koji Nishikimi & Tony E. Smith, 2008. "The Number-Average Size Rule: A New Empirical Relationship Between Industrial Location And City Size," Journal of Regional Science, Wiley Blackwell, vol. 48(1), pages 165-211.
  40. Peter F. Kostiuk, 1990. "Firm Size and Executive Compensation," Journal of Human Resources, University of Wisconsin Press, vol. 25(1), pages 90-105.
  41. Barro, Robert, 2006. "Rare Disasters and Asset Markets in the Twentieth Century," Scholarly Articles 3208215, Harvard University Department of Economics.
  42. Jensen, M.C. & Murphy, K.J., 1988. "Performance Pay And Top Management Incentives," Papers 88-04, Rochester, Business - Managerial Economics Research Center.
  43. Xavier Gabaix & Rustam Ibragimov, 2011. "Rank - 1 / 2: A Simple Way to Improve the OLS Estimation of Tail Exponents," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 29(1), pages 24-39, January.
  44. Durlauf,S.N., 2003. "Complexity and emperical economics," Working papers 2, Wisconsin Madison - Social Systems.
  45. Fabrizio Lillo & Rosario N. Mantegna, 2001. "Power law relaxation in a complex system: Omori law after a financial market crash," Papers cond-mat/0111257, arXiv.org, revised Jun 2003.
  46. J. Barkley Rosser, 2009. "Introduction," Chapters, in: Handbook of Research on Complexity, chapter 1 Edward Elgar.
  47. Xavier Gabaix, 1999. "Zipf's Law and the Growth of Cities," American Economic Review, American Economic Association, vol. 89(2), pages 129-132, May.
  48. Thomas Lux & D. Sornette, 1999. "On Rational Bubbles and Fat Tails," Papers cond-mat/9910141, arXiv.org.
  49. Vasco M Carvalho, 2008. "Aggregate Fluctuations and the Network Structure of Intersectoral Trade," 2008 Meeting Papers 1062, Society for Economic Dynamics.
  50. Costas Arkolakis, 2008. "Market Penetration Costs and Trade Dynamics," 2008 Meeting Papers 548, Society for Economic Dynamics.
  51. Elhanan Helpman & Marc J. Melitz & Stephen R. Yeaple, 2004. "Export Versus FDI with Heterogeneous Firms," American Economic Review, American Economic Association, vol. 94(1), pages 300-316, March.
  52. Matthieu Wyart & Jean-Philippe Bouchaud & Julien Kockelkoren & Marc Potters & Michele Vettorazzo, 2008. "Relation between bid-ask spread, impact and volatility in order-driven markets," Quantitative Finance, Taylor & Francis Journals, vol. 8(1), pages 41-57.
  53. Makoto Nirei & Wataru Souma, 2007. "A Two Factor Model Of Income Distribution Dynamics," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 53(3), pages 440-459, 09.
  54. Esteban Rossi-Hansberg & Mark L. J. Wright, 2006. "Establishment size dynamics in the aggregate economy," Staff Report 382, Federal Reserve Bank of Minneapolis.
  55. Xavier Gabaix & Yannis M. Ioannides, 2003. "The Evolution of City Size Distributions," Discussion Papers Series, Department of Economics, Tufts University 0310, Department of Economics, Tufts University.
  56. Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, vol. 36, pages 394.
  57. V. Plerou & P. Gopikrishnan & L. A. N. Amaral & M. Meyer & H. E. Stanley, 1999. "Scaling of the distribution of price fluctuations of individual companies," Papers cond-mat/9907161, arXiv.org.
  58. Fujiwara, Yoshi & Di Guilmi, Corrado & Aoyama, Hideaki & Gallegati, Mauro & Souma, Wataru, 2004. "Do Pareto–Zipf and Gibrat laws hold true? An analysis with European firms," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 335(1), pages 197-216.
  59. Mulligan, Casey B, 1997. "Scale Economies, the Value of Time, and the Demand for Money: Longitudinal Evidence from Firms," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1061-79, October.
  60. Fu, Dongfeng & Pammolli, Fabio & Buldyrev, Sergey V. & Riccaboni, Massimo & Matia, Kaushik & Yamasaki, Kazuko & Stanley, H. Eugene, 2005. "The Growth of Business Firms: Theoretical Framework and Empirical Evidence," MPRA Paper 15905, University Library of Munich, Germany.
  61. Levy, Moshe, 2003. "Are rich people smarter?," Journal of Economic Theory, Elsevier, vol. 110(1), pages 42-64, May.
  62. Duranton, Gilles, 2006. "Some foundations for Zipf's law: Product proliferation and local spillovers," Regional Science and Urban Economics, Elsevier, vol. 36(4), pages 542-563, July.
  63. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-21, September.
  64. Martin L. Weitzman, 2007. "Subjective Expectations and Asset-Return Puzzles," American Economic Review, American Economic Association, vol. 97(4), pages 1102-1130, September.
  65. Sattinger, Michael, 1993. "Assignment Models of the Distribution of Earnings," Journal of Economic Literature, American Economic Association, vol. 31(2), pages 831-80, June.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:anr:reveco:v:1:y:2009:p:255-294. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (http://www.annualreviews.org)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.