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A Two Factor Model Of Income Distribution Dynamics


  • Makoto Nirei
  • Wataru Souma


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.

Suggested Citation

  • 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, September.
  • Handle: RePEc:bla:revinw:v:53:y:2007:i:3:p:440-459
    DOI: 10.1111/j.1475-4991.2007.00242.x

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