Exponential structure of income inequality: evidence from 67 countries

• Published in: Journal of economic interaction and coordination Vol. 14; no. 2; pp. 345 - 376
• Main Authors: Tao, Yong, Wu, Xiangjun, Zhou, Tao, Yan, Weibo, Huang, Yanyuxiang, Yu, Han, Mondal, Benedict, Yakovenko, Victor M.
• Format: Journal Article
• Language: English
• Published: Berlin/Heidelberg Springer Berlin Heidelberg 01-06-2019; Springer Nature B.V
• Subjects: Computer Appl. in Social and Behavioral Sciences; Economic models; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Economics and Finance; Finance; Income distribution; Income inequality; Mathematical and Computational Physics; Regular Article; Theoretical; D63; Income inequality; Rawls’ fairness; D51; D31; Technological progress; E14; Entropy; General equilibrium
• ISSN: 1860-711X; 1860-7128
• DOI: 10.1007/s11403-017-0211-6

Economic competition between humans leads to income inequality, but, so far, there has been little understanding of underlying quantitative mechanisms governing such a collective behavior. We analyze datasets of household income from 67 countries, ranging from Europe to Latin America, North America and Asia. For all of the countries, we find a surprisingly uniform rule: income distribution for the great majority of populations (low and middle income classes) follows an exponential law. To explain this empirical observation, we propose a theoretical model within the standard framework of modern economics and show that free competition and Rawls’ fairness are the underlying mechanisms producing the exponential pattern. The free parameters of the exponential distribution in our model have an explicit economic interpretation and direct relevance to policy measures intended to alleviate income inequality.