Zipf's Law, Pareto's Law, and the Evolution of Top Incomes in the U.S

Shuhei Aoki and Makoto Nirei

MPRA Paper from University Library of Munich, Germany

Abstract: We 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 U.S. The model matches the decline in the Pareto exponent of the income distribution and the trend of the top 1% income share in recent decades.

Keywords: income distribution; wealth distribution; Pareto exponent; top income share; firm size distribution; Zipf's law (search for similar items in EconPapers)
JEL-codes: D31 L11 O40 (search for similar items in EconPapers)
Date: 2016-09-15
New Economics Papers: this item is included in nep-bec and nep-ent
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Related works:
Working Paper: Zipf's Law, Pareto's Law, and the Evolution of Top Incomes in the U.S (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:73896

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