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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.
Publication Date: 2016
Electronic Publication Date: 2016
Citation: Gabaix, Xavier, Lasry, Jean-Michel, Lions, Pierre-Louis, Moll, Benjamin. (2016). The Dynamics of Inequality. Econometrica, 84 (6), 2071 - 2111. doi:10.3982/ECTA13569
DOI: doi:10.3982/ECTA13569
ISSN: 0012-9682
Pages: 1 - 41
Type of Material: Journal Article
Journal/Proceeding Title: Econometrica
Version: Final published version. Article is made available in OAR by the publisher's permission or policy.

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