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Income Distribution among Individuals: The effects of economic interactions

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  • ARATA Yoshiyuki

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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  • ARATA Yoshiyuki, 2013. "Income Distribution among Individuals: The effects of economic interactions," Discussion papers 13042, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:dpaper:13042
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    File URL: https://www.rieti.go.jp/jp/publications/dp/13e042.pdf
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    References listed on IDEAS

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    1. Levy, Moshe, 2003. "Are rich people smarter?," Journal of Economic Theory, Elsevier, vol. 110(1), pages 42-64, May.
    2. Xavier Gabaix, 1999. "Zipf's Law for Cities: An Explanation," The Quarterly Journal of Economics, Oxford University Press, vol. 114(3), pages 739-767.
    3. 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.
    4. 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.
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