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Zipf's Law, Pareto's Law, and the Evolution of Top Incomes in the U.S

Author

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  • Makoto Nirei

    (Hitotsubashi University)

  • Shuhei Aoki

    (Hitotsubashi University)

Abstract

We construct a tractable neoclassical growth model that generates Pareto's law of income distribution and Zipf's law of firm size distribution from idiosyncratic, firm-level productivity shocks. CEOs invest in risk-free assets as well as their own firms' risky stocks, through which their assets and incomes depend on firm-level shocks. Using the model, we evaluate how changes in tax rates can account for the recent evolution of top incomes in the U.S. The model matches the decline in the Pareto exponent of income distribution and the trend of the top 1% income share in the U.S. in recent decades.

Suggested Citation

  • Makoto Nirei & Shuhei Aoki, 2015. "Zipf's Law, Pareto's Law, and the Evolution of Top Incomes in the U.S," 2015 Meeting Papers 926, Society for Economic Dynamics.
  • Handle: RePEc:red:sed015:926
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    Cited by:

    1. Andreas Fagereng & Luigi Guiso & Davide Malacrino & Luigi Pistaferri, 2020. "Heterogeneity and Persistence in Returns to Wealth," Econometrica, Econometric Society, vol. 88(1), pages 115-170, January.
    2. Jess Benhabib & Alberto Bisin, 2018. "Skewed Wealth Distributions: Theory and Empirics," Journal of Economic Literature, American Economic Association, vol. 56(4), pages 1261-1291, December.
    3. Xavier Gabaix & Jean‐Michel Lasry & Pierre‐Louis Lions & Benjamin Moll, 2016. "The Dynamics of Inequality," Econometrica, Econometric Society, vol. 84, pages 2071-2111, November.
    4. 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.

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    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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