Power Laws in Economics and Finance

Xavier Gabaix

No 14299, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A power law is the form taken by a large number of surprising empirical regularities in economics and finance. This article surveys well-documented empirical power laws concerning income and wealth, the size of cities and firms, stock market returns, trading volume, international trade, and executive pay. It reviews detail-independent theoretical motivations that make sharp predictions concerning the existence and coefficients of power laws, without requiring delicate tuning of model parameters. These theoretical mechanisms include random growth, optimization, and the economics of superstars coupled with extreme value theory. Some of the empirical regularities currently lack an appropriate explanation. This article highlights these open areas for future research.

JEL-codes: E0 F1 G1 R0 (search for similar items in EconPapers)
Date: 2008-09
Note: AP EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (63)

Published as Xavier Gabaix, 2009. "Power Laws in Economics and Finance," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 255-294, 05.

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