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Universal Exponential Structure of Income Inequality: Evidence from 60 Countries

Yong Tao, Xiangjun Wu, Tao Zhou, Weibo Yan, Yanyuxiang Huang, Han Yu, Benedict Mondal and Victor Yakovenko ()

Papers from arXiv.org

Abstract: Economic competition between humans leads to income inequality, but, so far, there has been little understanding of underlying quantitative mechanisms governing such a collective behavior. We analyze datasets of household income from 60 countries, ranging from Europe to Latin America, North America and Asia. For all of the countries, we find a surprisingly universal rule: Income distribution for the great majority of populations (low and middle income classes) follows an exponential law. To explain this empirical observation, we propose a theoretical model within the standard framework of modern economics and show that free competition and Rawls fairness are the underlying mechanisms producing the exponential pattern. The free parameters of the exponential distribution in our model have an explicit economic interpretation and direct relevance to policy measures intended to alleviate income inequality.

New Economics Papers: this item is included in nep-sea
Date: 2016-12
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