The Dynamics of Inequality

39 Pages Posted: 12 Jan 2016

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: December 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 tail of the long-run income distributions, 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 two parsimonious deviations from the canonical model that can explain such changes: "scale dependence" that may arise from changes in skill prices, and "type dependence," i.e. the presence of some "high-growth types." These deviations are consistent with theories in which the increase in top income inequality is driven by the rise of "superstar" entrepreneurs or managers.

Keywords: inequality, operator methods, Pareto distribution, speed of transition, superstars

JEL Classification: D31, E24

Suggested Citation

Gabaix, Xavier and Lasry, Jean-Michel and Lions, Pierre-Louis and Moll, Benjamin, The Dynamics of Inequality (December 2015). CEPR Discussion Paper No. DP11028. Available at SSRN: https://ssrn.com/abstract=2714268

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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