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A Schumpeterian Model of Top Income Inequality


  • Charles I. Jones
  • Jihee Kim


Top income inequality rose sharply in the United States over the last 35 years but increased only slightly in economies like France and Japan. Why? This paper explores a model in which heterogeneous entrepreneurs, broadly interpreted, exert effort to generate exponential growth in their incomes. On its own, this force leads to rising inequality. Creative destruction by outside innovators restrains this expansion and induces top incomes to obey a Pareto distribution. The development of the world wide web and a reduction in top tax rates are examples of changes that raise the growth rate of entrepreneurial incomes and therefore increase Pareto inequality. In contrast, policies that stimulate creative destruction reduce top inequality. Examples include research subsidies or a decline in the extent to which incumbent firms can block new innovation. Differences in these considerations across countries and over time, perhaps associated with globalization, may explain the varied patterns of top income inequality that we see in the data.

Suggested Citation

  • Charles I. Jones & Jihee Kim, 2014. "A Schumpeterian Model of Top Income Inequality," NBER Working Papers 20637, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20637
    Note: EFG LS PE

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    References listed on IDEAS

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    Cited by:

    1. Ufuk Akcigit & Richard Blundell & David Hemous & Antonin Bergeaud & Philippe Aghion, 2015. "Innovation and Top Income Inequality," 2015 Meeting Papers 1115, Society for Economic Dynamics.
    2. de la Fonteijne, Marcel R., 2015. "Jones on Piketty's r>g: A critique," MPRA Paper 83830, University Library of Munich, Germany.
    3. Alessandra Bonfiglioli & Rosario Crinò & Gino Gancia, 2014. "Betting on exports: Trade and endogenous heterogeneity," Economics Working Papers 1460, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2016.
    4. Chhy, Niroth, 2016. "The Rise of the Working Rich, Market Imperfections, and Income Inequality," MPRA Paper 75373, University Library of Munich, Germany.
    5. Bandyopadhyay, Subhayu & Dinopoulos, Elias & Unel, Bulent, 2016. "Effects of Credit Supply on Unemployment and Inequality," IZA Discussion Papers 10006, Institute for the Study of Labor (IZA).
    6. Malm, Arvid & Sanandaji, Tino, 2015. "The role of entrepreneurship in rising wealth and income inequality," Working Paper Series in Economics and Institutions of Innovation 398, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    7. Xavier Gabaix & Jean‐Michel Lasry & Pierre‐Louis Lions & Benjamin Moll, 2016. "The Dynamics of Inequality," Econometrica, Econometric Society, vol. 84, pages 2071-2111, November.
    8. Luttmer, Erzo G. J., 2014. "An Assignment Model of Knowledge Diffusion and Income Inequality," Working Papers 715, Federal Reserve Bank of Minneapolis.
    9. Ricardo T. Fernholz, 2016. "A Statistical Model of Inequality," Papers 1601.04093,
    10. Caiani, Alessandro & Russo, Alberto & Gallegati, Mauro, 2016. "Does Inequality Hamper Innovation and Growth?," MPRA Paper 71864, University Library of Munich, Germany.
    11. repec:eee:macchp:v2-3 is not listed on IDEAS
    12. Jakob B. Madsen & Antonio Minniti & Francesco Venturini, 2015. "Assessing Piketty’s laws of capitalism," Monash Economics Working Papers 34-15, Monash University, Department of Economics.
    13. Morten Olsen & Joshua Gottlieb & David Hemous & Jeffrey Clemens, 2017. "The Spill-over Effects of Top Income Inequality," 2017 Meeting Papers 332, Society for Economic Dynamics.
    14. Daron Acemoglu & James A. Robinson, 2015. "The Rise and Decline of General Laws of Capitalism," Journal of Economic Perspectives, American Economic Association, vol. 29(1), pages 3-28, Winter.
    15. Miroslav Gabrovski, 2017. "Coordination Frictions and Economic Growth," 2017 Papers pga928, Job Market Papers.
    16. Yves Achdou & Jiequn Han & Jean-Michel Lasry & Pierre-Louis Lions & Benjamin Moll, 2017. "Income and Wealth Distribution in Macroeconomics: A Continuous-Time Approach," NBER Working Papers 23732, National Bureau of Economic Research, Inc.
    17. Nezih Guner & Andrii Parkhomenko & Gustavo Ventura, 2018. "Managers and Productivity Differences," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 256-282, July.
    18. Jack Britton & Neil Shephard & Anna Vignoles, 2015. "Comparing sample survey measures of English earnings of graduates with administrative data during the Great Recession," IFS Working Papers W15/28, Institute for Fiscal Studies.
    19. Anna M. Stansbury & Lawrence H. Summers, 2017. "Productivity and Pay: Is the link broken?," NBER Working Papers 24165, National Bureau of Economic Research, Inc.
    20. Jones, C.I., 2016. "The Facts of Economic Growth," Handbook of Macroeconomics, Elsevier.
    21. repec:hrv:faseco:34651703 is not listed on IDEAS
    22. Benhabib, Jess & Bisin, Alberto & Zhu, Shenghao, 2015. "The wealth distribution in Bewley economies with capital income risk," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 489-515.
    23. 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.
    24. Francois Geerolf, 2015. "A Static and Microfounded Theory of Zipf's Law for Firms and of the Top Labor Income Distribution," 2015 Meeting Papers 516, Society for Economic Dynamics.
    25. Chu, Angus C. & Cozzi, Guido, 2016. "Patents vs R&D Subsidies on Income Inequality," MPRA Paper 73482, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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