The Dynamics of Inequality
Xavier Gabaix, Jean-Michel Lasry, Pierre-Louis Lions, Benjamin Moll∗
September 3, 2014
preliminary and incomplete
please do not circulate
Abstract
What explains the rapid rise in top income inequality and the more gradual rise in
top wealth inequality in the United States over the part forty years? It it well known
that the upper tails of income and wealth distribution follow power laws. Standard
theories of top inequality at a point in time appeal to proportional random growth as
the basic mechanism generating this pattern. We ask whether such theories can also
explain the dynamics of income and wealth inequality observed in the United States.
We derive an analytic formula for the speed of convergence of the distribution of income
or wealth, and find that high inequality goes hand in hand with slow transitions.
Furthermore, transitions are particularly slow in the upper tail of the distribution.
Calibrated versions of the model can explain the gradual rise in observed top wealth
inequality, but not the rapid rise in top income inequality. We conclude by discussing
alternative explanations for rising income inequality.
NYU Stern, Dauphine, Collège de France, Princeton. We thank Cristian Alonso and Nik Engbom for
excellent research assistance.
∗
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