A Schumpeterian Model of Top Income Inequality

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Top income inequality rose sharply in the United States over the last 35 years but increased only slightly in economies like France and Japan. Why? This paper explores a model in which heterogeneous entrepreneurs, broadly interpreted, exert effort to generate exponential growth in their incomes. On its own, this force leads to rising inequality. Creative destruction by outside innovators restrains this expansion and induces top incomes to obey a Pareto distribution. The development of the world wide web, a reduction in top tax rates, and a decline in misallocation are examples of changes that raise the growth rate of entrepreneurial incomes and therefore increase Pareto inequality. In contrast, policies that stimulate creative destruction reduce top inequality. Examples include research subsidies or a decline in the extent to which incumbent firms can block new innovation. Differences in these considerations across countries and over time, perhaps associated with globalization, may explain the varied patterns of top income inequality that we see in the data.
Publisher
National Bureau of Economic Research
Issue Date
2014-10
Language
English
Citation

NBER Working Paper Series, v.20637

ISSN
0898-2937
DOI
10.3386/w20637
URI
http://hdl.handle.net/10203/199120
Appears in Collection
MG-Journal Papers(저널논문)
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