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The Pareto law of incomes—an explanation and an extension

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  • Reed, William J.

Abstract

A stochastic model for the generation of observed income distributions is used to provide an explanation for the Pareto law of incomes. Analysis of the model also yields a prediction of Paretian (power law) behaviour in the lower tail of the distribution and this is shown to occur in a number of empirical distributions. A tractable four-parameter distribution is derived, and shown to fit extremely well to a number of different empirical income distributions.

Suggested Citation

  • Reed, William J., 2003. "The Pareto law of incomes—an explanation and an extension," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 319(C), pages 469-486.
  • Handle: RePEc:eee:phsmap:v:319:y:2003:i:c:p:469-486
    DOI: 10.1016/S0378-4371(02)01507-8
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