Exponential Structure of Income Inequality: Evidence from 67 Countries

TL;DR

This paper uncovers a universal exponential pattern in income distribution across 67 countries and proposes a theoretical model linking free competition and fairness to this pattern, offering insights for policy measures.

Contribution

It reveals a universal exponential income distribution pattern and introduces a model connecting economic competition and fairness to this phenomenon.

Findings

Income distribution follows an exponential law in most countries.

Theoretical model links free competition and fairness to the exponential pattern.

Model parameters have explicit economic interpretations.

Abstract

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.