A Simple Theory of Pareto Earnings

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Abstract

I introduce a simple model which endogenously generates a Pareto distribution in top earnings, consistent with empirics. Workers inhabit different niches, and the earnings of a worker is determined by the niche-specifc supply of labor and a constant-elasticity labor-demand curve. The highest paid workers are the ones that inhabit a niche with few other workers. A Pareto tail in earnings emerges as long as the distribution of workers over niches satisfies a regularity condition from extreme-value theory, satisfied by virtually all continuous distributions in economics.
Original languageEnglish
Place of PublicationFrederiksberg
PublisherCopenhagen Business School [wp]
Number of pages11
Publication statusPublished - 2020
SeriesWorking Paper / Department of Economics. Copenhagen Business School
Number21-2020

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