Working Paper: CEPR ID: DP11028
Authors: Xavier Gabaix; Jean-Michel Lasry; Pierre-Louis Lions; Benjamin Moll
Abstract: The past forty years have seen a rapid rise in top income inequality in the United States. While there is a large number of existing theories of the Pareto tail of the long-run income distributions, almost none of these address the fast rise in top inequality observed in the data. We show that standard theories, which build on a random growth mechanism, generate transition dynamics that are an order of magnitude too slow relative to those observed in the data. We then suggest two parsimonious deviations from the canonical model that can explain such changes: "scale dependence" that may arise from changes in skill prices, and "type dependence," i.e. the presence of some "high-growth types." These deviations are consistent with theories in which the increase in top income inequality is driven by the rise of "superstar" entrepreneurs or managers.
Keywords: inequality; operator methods; pareto distribution; speed of transition; superstars
JEL Codes: D31; E24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| standard random growth models (O41) | inability to explain empirical observations (D10) |
| inadequacies of standard random growth models (O41) | rapid rise in top income inequality (D31) |
| type dependence in growth rates (O41) | rapid rise in income inequality (D31) |
| shocks affecting high incomes (D31) | infinitely fast transitions in inequality (C69) |
| augmented random growth model (O41) | fast transitions observed in the data (C69) |