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Maximum Entropy Power Laws: An Application to the Tail of Wealth Distributions

  • Mishael Milakovic'

tatistical equilibrium denotes the distribution of wealth that can be achieved in the largest number of ways while satisfying a first moment constraint on the rate of growth in wealth portfolios. Maximizing entropy subject to a logarithmic constraint yields a power law distribution whose characteristic exponent depends positively on the minimum wealth level, and inversely on the rate of growth and the average number of changes in the composition of wealth portfolios. Put differently, the distribution of wealth will be more unequal the faster the rate of growth in wealth and also the higher the number of turnovers.

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Paper provided by Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy in its series LEM Papers Series with number 2003/01.

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Date of creation: 03 Dec 2003
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Handle: RePEc:ssa:lemwps:2003/01
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  1. Reed, William J., 2001. "The Pareto, Zipf and other power laws," Economics Letters, Elsevier, vol. 74(1), pages 15-19, December.
  2. Kotlikoff, Laurence J & Summers, Lawrence H, 1981. "The Role of Intergenerational Transfers in Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 706-32, August.
  3. Oulton, Nicholas, 1976. "Inheritance and the Distribution of Wealth," Oxford Economic Papers, Oxford University Press, vol. 28(1), pages 86-101, March.
  4. Brock, W A, 1999. "Scaling in Economics: A Reader's Guide," Industrial and Corporate Change, Oxford University Press, vol. 8(3), pages 409-46, September.
  5. Joseph E. Stiglitz, 1967. "Distribution of Income and Wealth Among Individuals," Cowles Foundation Discussion Papers 238, Cowles Foundation for Research in Economics, Yale University.
  6. Vincenzo Quadrini & José-Víctor Ríos-Rull, 1997. "Understanding the U.S. distribution of wealth," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 22-36.
  7. Youngki Lee & Luis A. N. Amaral & David Canning & Martin Meyer & H. Eugene Stanley, 1998. "Universal features in the growth dynamics of complex organizations," Papers cond-mat/9804100, arXiv.org.
  8. Foley Duncan K., 1994. "A Statistical Equilibrium Theory of Markets," Journal of Economic Theory, Elsevier, vol. 62(2), pages 321-345, April.
  9. Xavier Gabaix, 1999. "Zipf'S Law For Cities: An Explanation," The Quarterly Journal of Economics, MIT Press, vol. 114(3), pages 739-767, August.
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