Pareto's Law for Income of Individuals and Debt of Bankrupt Companies

TL;DR

This paper investigates the power law distributions of income, taxes, and company debts in Japan, revealing consistent Pareto exponents and discussing implications for economic modeling.

Contribution

It demonstrates that income, taxes, and company debts follow power law distributions with specific Pareto exponents, linking income and debt distributions.

Findings

Income and tax distributions follow a Pareto law with exponent -2.

Bankrupt companies' debts follow a Pareto law with exponent -1.

The same power law applies to company income and debt distributions.

Abstract

We analyze the distribution of income and income tax of individuals in Japan for the fiscal year 1998. From the rank-size plots we find that the accumulated probability distribution of both data obey a power law with a Pareto exponent very close to -2. We also present an analysis of the distribution of the debts owed by bankrupt companies from 1997 to March, 2000, which is consistent with a power law behavior with a Pareto exponent equal to -1. This power law is the same as that of the income distribution of companies. Possible implications of these findings for model building are discussed.