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A Schumpeterian Model of Top Income Inequality

Listed author(s):
  • 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.

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File URL: http://www.nber.org/papers/w20637.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 20637.

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Date of creation: Oct 2014
Handle: RePEc:nbr:nberwo:20637
Note: EFG LS PE
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  9. Fatih Guvenen & Serdar Ozkan & Jae Song, 2014. "The Nature of Countercyclical Income Risk," Journal of Political Economy, University of Chicago Press, vol. 122(3), pages 621-660.
  10. Xavier Gabaix, 1999. "Zipf's Law for Cities: An Explanation," The Quarterly Journal of Economics, Oxford University Press, vol. 114(3), pages 739-767.
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  12. Nirei, Makoto, 2009. "Pareto Distributions in Economic Growth Models," IIR Working Paper 09-05, Institute of Innovation Research, Hitotsubashi University.
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