The Dynamics of Inequality

46 Pages Posted: 20 Jul 2015 Last revised: 12 Aug 2015

See all articles by Xavier Gabaix

Xavier Gabaix

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

Jean-Michel Lasry

BNP Paribas; Université Paris Dauphine - CEREMADE

Pierre-Louis Lions

Université Paris Dauphine - CEREMADE; Consultant Caisse Autonome de Refinancement (CDC group)

Benjamin Moll

Princeton University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 2015

Abstract

The past forty years have seen a rapid rise in top income inequality in the United States. While there is a large number of existing theories of the Pareto tails of the income and wealth distributions at a given point in time, almost none of these address the fast rise in top inequality observed in the data. We show that standard theories, which build on a random growth mechanism, generate transition dynamics that are an order of magnitude too slow relative to those observed in the data. We then suggest parsimonious deviations from the basic model that can explain such changes, namely heterogeneity in mean growth rates or deviations from Gibrat's law. These deviations are consistent with theories in which the increase in top income inequality is driven by the rise of "superstar" entrepreneurs or managers.

Suggested Citation

Gabaix, Xavier and Lasry, Jean-Michel and Lions, Pierre-Louis and Moll, Benjamin, The Dynamics of Inequality (July 2015). NBER Working Paper No. w21363. Available at SSRN: https://ssrn.com/abstract=2633319

Xavier Gabaix (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Jean-Michel Lasry

BNP Paribas ( email )

London NW1 6AA
United Kingdom

Université Paris Dauphine - CEREMADE

Place du Marechal de Lattre de Tassigny
Paris Cedex 16, 75775
France

Pierre-Louis Lions

Université Paris Dauphine - CEREMADE ( email )

Place du Marechal de Lattre de Tassigny
Paris Cedex 16, 75775
France

Consultant Caisse Autonome de Refinancement (CDC group)

33 rue de Mogador
F-75009 Paris
France

Benjamin Moll

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

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