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

58 Pages Posted: 18 Apr 2014 Last revised: 22 Sep 2016

See all articles by Shuhei Aoki

Shuhei Aoki

Department of Economics, Shinshu University

Makoto Nirei

The University of Tokyo

Date Written: September 15, 2016

Abstract

We construct a tractable neoclassical growth model that generates Pareto's law of income distribution and Zipf's law of the firm size distribution from idiosyncratic, firm-level productivity shocks. Executives and entrepreneurs invest in risk-free assets as well as their own firms' risky stocks, through which their wealth and income depend on firm-level shocks. By using the model, we evaluate how changes in tax rates can account for the evolution of top incomes in the U.S. The model matches the decline in the Pareto exponent of the income distribution and the trend of the top 1% income share in recent decades.

Keywords: income distribution, wealth distribution, Pareto exponent, top income share, firm size distribution, Zipf’s law

JEL Classification: D31, L11, O40

Suggested Citation

Aoki, Shuhei and Nirei, Makoto, Zipf's Law, Pareto's Law, and the Evolution of Top Incomes in the U.S. (September 15, 2016). Available at SSRN: https://ssrn.com/abstract=2426418 or http://dx.doi.org/10.2139/ssrn.2426418

Shuhei Aoki (Contact Author)

Department of Economics, Shinshu University ( email )

3-1-1 Asahi, Matsumoto
Nagano 390-8621
Japan

Makoto Nirei

The University of Tokyo ( email )

7-3-1 Hongo
Bunkyo-ku
Tokyo, 113-0033
Japan

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