Entrepreneurship and Income Distribution Dynamics: Why Is the Income Share of Top Income Earners Acyclical over the Business Cycle?

The U.S. economy shows a contrasting difference in cyclical properties between low- and highincome groups. Income shares of the bottom three income quintiles are procyclical, while those of the next 35 percent are countercyclical. However, the income share of the very top five percent income group is acyclical over the business cycle. This study attempts to explain the cyclical behavior of the income distribution over the business cycle, particularly focusing on the top five percent income earners’ share, using a heterogeneous agent model featuring a choice to become an entrepreneur. The model economy successfully reproduces the acyclical behavior of the income share of the top five percent income earners as well as the overall cyclicality of income shares of the income groups. In an economic expansion, relatively more people in the low income groups newly begin employment as workers, which raises the income shares of the bottom three quintiles and lowers the income shares of the top two quintiles, while at the top, relatively more people become entrepreneurs, which offsets the decline in the income share of the high-income earners from the workers’ side.