Power Laws in Economics and Finance

62 Pages Posted: 8 Sep 2008  

Xavier Gabaix

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

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Date Written: September 2008

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.

Suggested Citation

Gabaix, Xavier, Power Laws in Economics and Finance (September 2008). NBER Working Paper No. w14299. Available at SSRN: https://ssrn.com/abstract=1264562

Xavier Gabaix (Contact Author)

New York University - Stern School of Business ( email )

Stern School of Business
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HOME PAGE: http://pages.stern.nyu.edu/~xgabaix/

Harvard University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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European Corporate Governance Institute (ECGI)

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Belgium

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