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Pareto Distributions in Economic Growth Models

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  • Nirei, Makoto
  • 楡井, 誠

Abstract

This paper analytically demonstrates that the tails of income and wealth distributions converge to a Pareto distribution in a variation of the Solow or Ramsey growth model where households bear idiosyncratic investment shocks. The Pareto exponent is shown to be decreasing in the shock variance, increasing in the growth rate, and increased by redistribution policies by income or bequest tax. Simulations show that even in the short run the exponent is affected by those fundamentals. We argue that the Pareto exponent is determined by the balance between the savings from labor income and the asset income contributed by risk-taking behavior.

Suggested Citation

  • Nirei, Makoto & 楡井, 誠, 2009. "Pareto Distributions in Economic Growth Models," IIR Working Paper 09-05, Institute of Innovation Research, Hitotsubashi University.
    • Handle: RePEc:hit:iirwps:09-05
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    Citations

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    Cited by:

    1. Thomas Blanchet & Juliette Fournier & Thomas Piketty, 2022. "Generalized Pareto Curves: Theory and Applications," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 68(1), pages 263-288, March.
    2. Xavier Gabaix & Jean‐Michel Lasry & Pierre‐Louis Lions & Benjamin Moll, 2016. "The Dynamics of Inequality," Econometrica, Econometric Society, vol. 84, pages 2071-2111, November.
    3. Fix, Blair, 2018. "A Hierarchy Model of Income Distribution," SocArXiv s3y2m, Center for Open Science.
    4. Tetsugen HARUYAMA, 2021. "A Schumpeterian Exploration of Gini and Top/Bottom Income Shares," Discussion Papers 2125, Graduate School of Economics, Kobe University.
    5. NIREI Makoto, 2011. "Investment Risk, Pareto Distribution, and the Effects of Tax," Discussion papers 11015, Research Institute of Economy, Trade and Industry (RIETI).
    6. Charles I. Jones, 2015. "Pareto and Piketty: The Macroeconomics of Top Income and Wealth Inequality," Journal of Economic Perspectives, American Economic Association, vol. 29(1), pages 29-46, Winter.
    7. Jan Schulz & Mishael Milaković, 2023. "How Wealthy are the Rich?," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 69(1), pages 100-123, March.
    8. Matteo Smerlak, 2014. "Thermodynamics of inequalities: from precariousness to economic stratification," Papers 1406.6441, arXiv.org, revised Nov 2014.
    9. Thomas Piketty & Emmanuel Saez, 2012. "A Theory of Optimal Capital Taxation," NBER Working Papers 17989, National Bureau of Economic Research, Inc.
    10. Charles I. Jones & Jihee Kim, 2018. "A Schumpeterian Model of Top Income Inequality," Journal of Political Economy, University of Chicago Press, vol. 126(5), pages 1785-1826.
    11. 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.
    12. Smerlak, Matteo, 2016. "Thermodynamics of inequalities: From precariousness to economic stratification," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 441(C), pages 40-50.
    13. Fix, Blair, 2018. "A Hierarchy Model of Income Distribution," Working Papers on Capital as Power 2018/02, Capital As Power - Toward a New Cosmology of Capitalism.
    14. Fix, Blair, 2018. "The Growth of US Top Income Inequality: A Hierarchical Redistribution Hypothesis," SocArXiv suqnk, Center for Open Science.
    15. Ricardo T. Fernholz, 2016. "A Statistical Model of Inequality," Papers 1601.04093, arXiv.org.
    16. Yannick Malevergne & Didier Sornette, 2016. "Wealth and Income Inequalities ← → r > g," Swiss Finance Institute Research Paper Series 16-69, Swiss Finance Institute.
    17. Aoki, Shuhei & Nirei, Makoto, 2013. "Pareto Distributions and the Evolution of Top Incomes in the U.S," MPRA Paper 47967, University Library of Munich, Germany.
    18. Blair Fix, 2018. "Hierarchy and the power-law income distribution tail," Journal of Computational Social Science, Springer, vol. 1(2), pages 471-491, September.
    19. Fix, Blair, 2018. "The growth of US top income inequality: A hierarchical redistribution hypothesis," Working Papers on Capital as Power 2018/05, Capital As Power - Toward a New Cosmology of Capitalism.
    20. Moshe Levy & Adi Rizansky Nir, 2014. "The Pricing of Breakthrough Drugs: Theory and Policy Implications," PLOS ONE, Public Library of Science, vol. 9(11), pages 1-12, November.
    21. 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.

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