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Power Laws in Economics and Finance

Xavier Gabaix

New York University - Stern School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

September 11, 2008

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.

Number of Pages in PDF File: 61

Keywords: scaling, fat tails, superstars, crashes

JEL Classification: E0,G1, R1

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Date posted: August 27, 2008 ; Last revised: April 3, 2009

Suggested Citation

Gabaix, Xavier, Power Laws in Economics and Finance (September 11, 2008). Available at SSRN: http://ssrn.com/abstract=1257822 or http://dx.doi.org/10.2139/ssrn.1257822

Contact Information

Xavier Gabaix (Contact Author)
New York University - Stern School of Business ( email )
Stern School of Business
44 West 4th Street, Suite 9-190
New York, NY 10012-1126
United States
HOME PAGE: http://pages.stern.nyu.edu/~xgabaix/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
European Corporate Governance Institute (ECGI)
B-1050 Brussels
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References:  156
Citations:  25

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