Exponential structure of income inequality: evidence from 67 countries
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Economic competition between humans leads to income inequality, but, so far, there has been little understanding of underlying quantitative mechanisms governing such a collective behavior. We analyze datasets of household income from 67 countries, ranging from Europe to Latin America, North America and Asia. For all of the countries, we find a surprisingly uniform rule: income distribution for the great majority of populations (low and middle income classes) follows an exponential law. To explain this empirical observation, we propose a theoretical model within the standard framework of modern economics and show that free competition and Rawls’ fairness are the underlying mechanisms producing the exponential pattern. The free parameters of the exponential distribution in our model have an explicit economic interpretation and direct relevance to policy measures intended to alleviate income inequality.
KeywordsIncome inequality General equilibrium Rawls’ fairness Technological progress Entropy
JEL ClassificationD31 D51 D63 E14
The authors would like to thank two anonymous referees and the editorial board for valuable comments and suggestions. All errors remain ours. Victor Yakovenko was supported by grant “Statistical Physics Approach to Income and Wealth Distribution” from the Institute for New Economic Thinking (INET), and Yong Tao by the Fundamental Research Funds for the Central Universities of China (Grant No. SWU1409444).
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