Zipf's Law, Pareto's Law, and the Evolution of Top Incomes in the United States†

Zipf's Law, Pareto's Law, and the Evolution of Top Incomes in the United States† AbstractWe construct a tractable neoclassical growth model that generates Pareto's law of income distribution and Zipf's law of the firm size distribution from idiosyncratic, firm-level productivity shocks. Executives and entrepreneurs invest in risk-free assets, as well as their own firms' risky stocks, through which their wealth and income depend on firm-level shocks. By using the model, we evaluate how changes in tax rates can account for the evolution of top incomes in the United States. The model matches the decline in the Pareto exponent of the income distribution and the trend of the top 1 percent income share in recent decades. (JEL D31, H24, L11) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Macroeconomics American Economic Association

Zipf's Law, Pareto's Law, and the Evolution of Top Incomes in the United States†

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Publisher
American Economic Association
Copyright
Copyright © 2017 © American Economic Association
ISSN
1945-7715
D.O.I.
10.1257/mac.20150051
Publisher site
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Abstract

AbstractWe construct a tractable neoclassical growth model that generates Pareto's law of income distribution and Zipf's law of the firm size distribution from idiosyncratic, firm-level productivity shocks. Executives and entrepreneurs invest in risk-free assets, as well as their own firms' risky stocks, through which their wealth and income depend on firm-level shocks. By using the model, we evaluate how changes in tax rates can account for the evolution of top incomes in the United States. The model matches the decline in the Pareto exponent of the income distribution and the trend of the top 1 percent income share in recent decades. (JEL D31, H24, L11)

Journal

American Economic Journal: MacroeconomicsAmerican Economic Association

Published: Jul 1, 2017

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