Power Laws in Economics and Finance
A power law is the form taken by a large number of surprising empirical regularities in economics and finance. This article surveys well-documented empirical power laws concerning income and wealth, the size of cities and firms, stock market returns, trading volume, international trade, and executive pay. It reviews detail-independent theoretical motivations that make sharp predictions concerning the existence and coefficients of power laws, without requiring delicate tuning of model parameters. These theoretical mechanisms include random growth, optimization, and the economics of superstars coupled with extreme value theory. Some of the empirical regularities currently lack an appropriate explanation. This article highlights these open areas for future research.
This work was supported NSF grant 0527518. I thank Esben Hedegaard and Rob Tumarking for very good research assistance, Jonathan Parker for the Schumpeter quote, Alex Edmans, Moshe Levy, Sorin Solomon, Gene Stanley for helpful comments. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Xavier Gabaix, 2009. "Power Laws in Economics and Finance," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 255-294, 05. citation courtesy of