DP11028 The Dynamics of Inequality

Author(s): Xavier Gabaix, Jean-Michel Lasry, Pierre-Louis Lions, Benjamin Moll
Publication Date: December 2015
Keyword(s): inequality, operator methods, Pareto distribution, speed of transition, superstars
JEL(s): D31, E24
Programme Areas: Labour Economics, Monetary Economics and Fluctuations, Macroeconomics and Growth
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11028

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.