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Pareto Distribution of Income in Neoclassical Growth Models

Author

Listed:
  • Shuhei Aoki

    (Hitotsubashi University)

  • Makoto Nirei

    (Hitotsubashi University)

Abstract

We construct a neoclassical growth model with heterogeneous households that accounts for the Pareto distributions of income and wealth in the upper tail. In an otherwise standard Bewley model, we feature households' business productivity risks and borrowing constraints, which we find generate the Pareto distributions. Households with low productivity rely on wages and returns from safe assets, while high productivity households choose not to diversify their business risks. The model can quantitatively account for the observed income distribution in the U.S. under reasonable calibrations. Furthermore, we conduct several comparative statics to examine how changes in parameters affect the Pareto distributions. In particular, we find that the change in the top tax rates in the 1980s potentially accounts for much of the observed increase in top income dispersion in the last decades. Our analytical result provides a coherent interpretation for the numerical comparative statics. (Copyright: Elsevier)

Suggested Citation

  • Shuhei Aoki & Makoto Nirei, 2016. "Pareto Distribution of Income in Neoclassical Growth Models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 25-42, April.
  • Handle: RePEc:red:issued:13-26
    DOI: 10.1016/j.red.2015.11.002
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    Cited by:

    1. Per Krusell & Anthony Smith & Joachim Hubmer, 2015. "The historical evolution of the wealth distribution: A quantitative-theoretic investigation," 2015 Meeting Papers 1406, Society for Economic Dynamics.
    2. Joseph E. Stiglitz, 2015. "New Theoretical Perspectives on the Distribution of Income and Wealth among Individuals: Part II: Equilibrium Wealth Distributions," NBER Working Papers 21190, National Bureau of Economic Research, Inc.
    3. Kazuo Mino, 2016. "Fiscal Policy in a Growing Economy with Financial Frictions and Firm Heterogeneity," The Japanese Economic Review, Japanese Economic Association, vol. 67(1), pages 3-30, March.
    4. Garbinti, Bertrand & Goupille-Lebret, Jonathan & Piketty, Thomas, 2017. "Accounting for Wealth Inequality Dynamics: Methods, Estimates and Simulations for France (1800-2014)," CEPR Discussion Papers 11848, C.E.P.R. Discussion Papers.
    5. Yannick Malevergne & Didier Sornette, 2016. "Wealth and Income Inequalities ← → r > g," Swiss Finance Institute Research Paper Series 16-69, Swiss Finance Institute.
    6. repec:red:issued:16-223 is not listed on IDEAS
    7. repec:red:issued:16-340 is not listed on IDEAS
    8. Mariacristina De Nardi & Giulio Fella, 2017. "Saving and Wealth Inequality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 280-300, October.
    9. Keiichi Kishi, 2016. "Technology Diffusion, Pareto Distribution, and Patent Policy," Discussion Papers in Economics and Business 16-31, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    10. HIRAGUCHI Ryoji, 2015. "Wealth Inequality, or r-g, in the Economic Growth Model," Discussion papers 15117, Research Institute of Economy, Trade and Industry (RIETI).
    11. Dan Cao & Wenlan Luo, 2017. "Persistent Heterogeneous Returns and Top End Wealth Inequality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 301-326, October.
    12. repec:aea:aejmac:v:9:y:2017:i:3:p:36-71 is not listed on IDEAS
    13. Kazufumi Yamana, "undated". "Structural Household Finance," Discussion papers ron279, Policy Research Institute, Ministry of Finance Japan.
    14. Shuhei Aoki & Makoto Nirei, 2014. "Zipf’s Law, Pareto’s Law, and the Evolution of Top Incomes in the U.S," UTokyo Price Project Working Paper Series 023, University of Tokyo, Graduate School of Economics.

    More about this item

    Keywords

    income distribution; Pareto exponent; idiosyncratic investment risk; entrepreneurs; borrowing constraint;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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