NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Jihee Kim

Department of Business and Technology Management
Korea Advanced Institute of Science and Technology
KAIST Bldg. N5 #2108,
335 Gwahangno (373-1 Guseong-dong),
Yuseong-gu, Daejeon,
305-701, South Korea

E-Mail: jiheekim@kaist.ac.kr

NBER Working Papers and Publications

October 2014A Schumpeterian Model of Top Income Inequality
with Charles I. Jones: w20637
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 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 e...
 
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