October 17, 2018

DIW Seminar on Macroeconomics and Financial Markets

"A Schumpeterian Model of Top Income Inequality"

Date

October 17, 2018
12:00-13:15

Location

Joan Robinson Room
DIW Berlin
Room 3.3.002a
Mohrenstraße 58
10117 Berlin

Speaker

Jihee Kim, Korea Advanced Institute of Science and Technology

Top income inequality rose sharply in the United States over the last 40 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 and a reduction in top tax rates 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 may explain the varied patterns of top income inequality that we see in the data.

Speaker

Jihee Kim, Korea Advanced Institute of Science and Technology