The Dynamics of Inequality

Xavier Gabaix, Jean Michel Lasry, Pierre Louis Lions, Benjamin Moll

Research output: Contribution to journalArticle

52 Scopus citations

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 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,” that is, 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.

Original languageEnglish (US)
Pages (from-to)2071-2111
Number of pages41
JournalEconometrica
Volume84
Issue number6
DOIs
StatePublished - Nov 1 2016

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • Inequality
  • Pareto distribution
  • operator methods
  • spectral methods
  • speed of transition
  • superstars

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    Gabaix, X., Lasry, J. M., Lions, P. L., & Moll, B. (2016). The Dynamics of Inequality. Econometrica, 84(6), 2071-2111. https://doi.org/10.3982/ECTA13569