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The Spill-over Effects of Top Income Inequality

Listed author(s):
  • Morten Olsen

    (IESE Business School)

  • Joshua Gottlieb

    (University of British Columbia)

  • David Hemous

    (University of Zurich)

  • Jeffrey Clemens

    (University of California at San Diego)

Since the 1980s top income inequality within occupations as diverse as bankers, managers, doctors, lawyers and scientists has increased considerably. Such a broad pattern has led the literature to search for a common explanation. In this paper, however, we argue that increases in income inequality originating within a few occupations can spill over"into others creating broader changes in income inequality. In particular, we study an assignment model where generalists with heterogeneous income buy the services of doctors with heterogeneous ability. In equilibrium the highest earning generalists match with the highest quality doctors and increases in income inequality among the generalists feed directly into the income inequality of doctors. We use data from the Decennial Census as well as the American Community Survey from 1980 to 2014 to test our theory. Specifically, we identify occupations for which our consumption-driven theory predicts spill-overs and occupations for which it does not and show that patterns align with the predictions of our model. In particular, using a Bartik-style instrument, we show that an increase in general income inequality causes higher income inequality for doctors, dentists and real estate agents; and in fact accounts for most of the increase of inequality in these occupations.

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File URL: https://economicdynamics.org/meetpapers/2017/paper_332.pdf
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Paper provided by Society for Economic Dynamics in its series 2017 Meeting Papers with number 332.

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Date of creation: 2017
Handle: RePEc:red:sed017:332
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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