Aoki, Shuhei and Nirei, Makoto (2013): Pareto Distributions and the Evolution of Top Incomes in the U.S.
Preview |
PDF
MPRA_paper_47967.pdf Download (1MB) | Preview |
Abstract
This paper presents a dynamic general equilibrium model with heterogeneous firms and entrepreneur's portfolio choice. We analytically show that this model generates the Pareto distribution of top income earners and Zipf's law of firms at the steady state. The differential equation for the probability density distribution of income is derived and numerically evaluated. In the model, CEOs respond to a tax cut by increasing their share of stocks of their own firms, thereby increasing the diffusion of their wealth. The calibrated model shows that the transition path matches with the decline of the Pareto exponent of the income distribution and the trend of top 1% income share in the U.S. in recent decades. We argue that the low marginal income tax at the top bracket of income could lead to the higher dispersion of income among the top income earners, which results in the higher concentration of income in the top income group.
Item Type: | MPRA Paper |
---|---|
Original Title: | Pareto Distributions and the Evolution of Top Incomes in the U.S. |
Language: | English |
Keywords: | income distribution; wealth distribution; Pareto exponent; top income share; firm size distribution; Zipf's law |
Subjects: | D - Microeconomics > D3 - Distribution > D31 - Personal Income, Wealth, and Their Distributions L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure ; Size Distribution of Firms O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General |
Item ID: | 47967 |
Depositing User: | Shuhei Aoki |
Date Deposited: | 02 Jul 2013 16:27 |
Last Modified: | 07 Oct 2019 11:32 |
References: | Alvaredo, Facundo, Anthony B. Atkinson, Thomas Piketty, and Emmanuel Saez (2013) ``The World Top Incomes Database.'' Data are extracted at 28/05/2013. Benhabib, Jess, Alberto Bisin, and Shenghao Zhu (2011) ``The Distribution of Wealth and Fiscal Policy in Economies with Finitely Lived Agents,'' Econometrica, Vol. 79, No. 1, pp. 123–157. Benhabib, Jess, Alberto Bisin, and Shenghao Zhu (2012) ``The Distribution of Wealth in the Blanchard-Yaari Model,'' mimeo. Blanchard, Olivier J (1985) ``Debt, Deficits, and Finite Horizons,'' Journal of Political Economy, Vol. 93, No. 2, pp. 223–47. Campbell, John Y. and Luis M. Viceira (2002) Strategic Asset Allocation: Portfolio Choice for Long-Term Investors: Oxford University Press. Davis, Steven J., John Haltiwanger, Ron Jarmin, and Javier Miranda (2007) ``Volatility and Dispersion in Business Growth Rates: Publicly Traded versus Privately Held Firms,'' in NBER Macroeconomics Annual 2006, Volume 21: National Bureau of Economic Research, Inc, pp. 107–180. Edmans, Alex, Xavier Gabaix, and Augustin Landier (2009) ``A Multiplicative Model of Optimal CEO Incentives in Market Equilibrium,'' Review of Financial Studies, Vol. 22, No. 12, pp. 4881–4917. Frydman, Carola and Raven E. Saks (2010) ``Executive Compensation: A New View from a Long-Term Perspective, 1936–2005,'' Review of Financial Studies, Vol. 23, No. 5, pp. 2099–2138. Gabaix, Xavier and Augustin Landier (2008) ``Why Has CEO Pay Increased So Much?'' Quarterly Journal of Economics, Vol. 123, No. 1, pp. 49–100. Gibbons, Robert and Kevin J Murphy (1992) ``Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence,'' Journal of Political Economy, Vol. 100, No. 3, pp. 468–505. Hacker, Jacob S. and Paul Pierson (2010) Winner-Take-All Politics: How Washington Made the Rich Richer-and Turned Its Back on the Middle Class: Simon and Schuster. Jones, Charles I. and Jihee Kim (2012) ``Exploring the Dynamics of Top Income Inequality,'' mimeo. Katz, Lawrence F and Kevin M Murphy (1992) ``Changes in Relative Wages, 1963-1987: Supply and Demand Factors,'' Quarterly Journal of Economics, Vol. 107, No. 1, pp. 35–78. Kim, Jihee (2013) ''The Effect of the Top Marginal Tax Rate on Top Income Inequality,'' mimeo. Luttmer, Erzo G.J. (2010) ``Models of Growth and Firm Heterogeneity,'' Annual Review of Economics, Vol. 2, No. 1, pp. 547–576. McGrattan, Ellen R. and Edward C. Prescott (2005) ``Taxes, Regulations, and the Value of U.S. and U.K. Corporations,'' Review of Economic Studies, Vol. 72, No. 3, pp. 767–796. Merton, Robert C. (1969) ``Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case,'' Review of Economics and Statistics, Vol. 51, No. 3, pp. 247–57. Merton, Robert C. (1971) ``Optimum consumption and portfolio rules in a continuous-time model,'' Journal of Economic Theory, Vol. 3, No. 4, pp. 373–413. Merton, Robert C. (1973) ``An Intertemporal Capital Asset Pricing Model,'' Econometrica, Vol. 41, No. 5, pp. 867–87. Mizuno, Takayuki, Atushi Ishikawa, Shouji Fujimoto, and Tsutomu Watanabe (2012) ``Power Laws in Firm Productivity,'' Progress of Theoretical Physics Supplement, Vol. 194, pp. 122-134. Murphy, Kevin J. (1985) ``Corporate Performance and Managerial Remuneration: An Empirical Analysis,'' Journal of Accounting and Economics, Vol. 7, No. 1–3, pp. 11–42. Nirei, Makoto (2009) ``Pareto Distributions in Economic Growth Models,'' IIR Working Paper 09-05, Institute of Innovation Research, Hitotsubashi University. Nirei, Makoto and Wataru Souma (2007) ``A Two Factor Model Of Income Distribution Dynamics,'' Review of Income and Wealth, Vol. 53, No. 3, pp. 440–459. Piketty, Thomas and Emmanuel Saez (2003) ``Income Inequality in the United States, 1913-1998,'' Quarterly Journal of Economics, Vol. 118, No. 1, pp. 1–39. Rosen, Sherwin (1992) ``Contracts and the Markets for Executives,'' in Werin, Lars and Hans Wijkander eds. Main Currents in Contract Economics: Blackwell Press. Saez, Emmanuel, Joel Slemrod, and Seth H. Giertz (2012) ``The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review,'' Journal of Economic Literature, Vol. 50, No. 1, pp. 3–50. Sinn, Hans-Werner (1991) ``Taxation and the Cost of Capital: The ‘Old’ View, the ‘New’ View, and Another View,'' in Tax Policy and the Economy, Volume 5: National Bureau of Economic Research, Inc, pp. 25–54. Toda, Alexis Akira (2012) ``Asset Pricing and Wealth Distribution with Heterogeneous Investment Returns,'' mimeo. |
URI: | https://mpra.ub.uni-muenchen.de/id/eprint/47967 |