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A TWO FACTOR MODEL OF INCOME DISTRIBUTION DYNAMICS
Author(s) -
Nirei Makoto,
Souma Wataru
Publication year - 2007
Publication title -
review of income and wealth
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.024
H-Index - 57
eISSN - 1475-4991
pISSN - 0034-6586
DOI - 10.1111/j.1475-4991.2007.00242.x
Subject(s) - economics , econometrics , pareto distribution , percentile , asset (computer security) , distribution (mathematics) , exponent , income distribution , empirical distribution function , pareto principle , mathematics , statistics , inequality , computer science , mathematical analysis , linguistics , philosophy , operations management , computer security
This paper analyzes empirical income distributions and proposes a simple stochastic model to explain the stationary distribution and deviations from it. Using the individual tax returns data in the U.S. and Japan for 40 years, we first summarize the shape of the income distribution by an exponential decay up to about the 90th percentile and a power decay for the top 1 percent. We then propose a minimal stochastic process of labor and asset income to reproduce the empirical characteristics. In particular, the Pareto exponent is derived analytically and matched with empirical statistics.