A Schumpeterian Model of Top Income Inequality

62 Pages Posted: 3 Nov 2014

See all articles by Charles I. Jones

Charles I. Jones

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Jihee Kim

Korea Advanced Institute of Science and Technology (KAIST)

Date Written: October 2014

Abstract

Top income inequality rose sharply in the United States over the last 35 years but increased only slightly in economies like France and Japan. Why? This paper explores a model in which heterogeneous entrepreneurs, broadly interpreted, exert effort to generate exponential growth in their incomes. On its own, this force leads to rising inequality. Creative destruction by outside innovators restrains this expansion and induces top incomes to obey a Pareto distribution. The development of the world wide web and a reduction in top tax rates are examples of changes that raise the growth rate of entrepreneurial incomes and therefore increase Pareto inequality. In contrast, policies that stimulate creative destruction reduce top inequality. Examples include research subsidies or a decline in the extent to which incumbent firms can block new innovation. Differences in these considerations across countries and over time, perhaps associated with globalization, may explain the varied patterns of top income inequality that we see in the data.

Suggested Citation

Jones, Charles I. and Kim, Jihee, A Schumpeterian Model of Top Income Inequality (October 2014). NBER Working Paper No. w20637. Available at SSRN: https://ssrn.com/abstract=2518727

Charles I. Jones (Contact Author)

Stanford Graduate School of Business ( email )

Stanford GSB
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650-725-9265 (Phone)

HOME PAGE: http://www.stanford.edu/~chadj

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jihee Kim

Korea Advanced Institute of Science and Technology (KAIST) ( email )

373-1 Kusong-dong
Yuson-gu
Taejon 305-701, 130-722
Korea, Republic of (South Korea)

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