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

Shuhei Aoki and Makoto Nirei

No 23, UTokyo Price Project Working Paper Series from University of Tokyo, Graduate School of Economics

Abstract: This paper presents a tractable dynamic general equilibrium model of income and firm-size distributions. The size and value of firms result from idiosyncratic, firm-level productivity shocks. CEOs can invest in their own firms’ risky stocks or in risk-free assets, implying that the CEO’s asset and income also depend on firm-level productivity shocks. We analytically show that this model generates the Pareto distribution of top income earners and Zipf’s law of firms in the steady state. Using the model, we evaluate how changes in tax rates can account for the recent evolution of top incomes in the U.S. The model matches the decline in the Pareto exponent of income distribution and the trend of the top 1% income share in the U.S. in recent decades. In the model, the lower marginal income tax for CEOs strengthens their incentive to increase the share of their firms’ risky stocks in their own asset portfolios. This leads to both higher dispersion and concentration of income in the top income group.

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)
Pages: 53 pages
Date: 2014-04
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Zipf's Law, Pareto's Law, and the Evolution of Top Incomes in the U.S (2016)
Working Paper: Zipf's Law, Pareto's Law, and the Evolution of Top Incomes in the U.S (2015)
Working Paper: Zipf's Law, Pareto's Law, and the Evolution of Top Incomes in the U.S (2014)
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