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Power laws, CEO compensation and inequality

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  • Blackwell, Calvin
  • Graefe-Anderson, Rachel
  • Hefner, Frank
  • Vaught, Dyanne

Abstract

We observe that CEO compensation and top incomes in the US have both been increasing rapidly over the last thirty years. We hypothesize that the trends in CEO compensation have been caused by the same economy-wide factors that have contributed to increases in income. We test this hypothesis by using ExecuComp and IRS tax data to estimate power law distributions and compare the behavior of these distributions over time. Using linear regression techniques, we estimate a power law distribution for CEO compensation and individual income. We find that the parameters of income distribution and the distribution of CEO compensation are correlated.

Suggested Citation

  • Blackwell, Calvin & Graefe-Anderson, Rachel & Hefner, Frank & Vaught, Dyanne, 2015. "Power laws, CEO compensation and inequality," Economics Letters, Elsevier, vol. 126(C), pages 78-80.
    • Handle: RePEc:eee:ecolet:v:126:y:2015:i:c:p:78-80
    DOI: 10.1016/j.econlet.2014.11.012
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    References listed on IDEAS

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    1. Carola Frydman & Raven E. Saks, 2010. "Executive Compensation: A New View from a Long-Term Perspective, 1936--2005," The Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 2099-2138.
    2. Xavier Gabaix & Augustin Landier, 2008. "Why has CEO Pay Increased So Much?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(1), pages 49-100.
    3. Anthony B. Atkinson & Thomas Piketty & Emmanuel Saez, 2011. "Top Incomes in the Long Run of History," Journal of Economic Literature, American Economic Association, vol. 49(1), pages 3-71, March.
    4. Drăgulescu, Adrian & Yakovenko, Victor M., 2001. "Exponential and power-law probability distributions of wealth and income in the United Kingdom and the United States," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 299(1), pages 213-221.
    5. Anthony Atkinson & Thomas Piketty, 2007. "Top incomes over the twentieth century: A contrast between continental european and english-speaking countries," Post-Print halshs-00754859, HAL.
    6. Michael Faulkender & Dalida Kadyrzhanova & N. Prabhala & Lemma Senbet, 2010. "Executive Compensation: An Overview of Research on Corporate Practices and Proposed Reforms," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 107-118, January.
    7. Atkinson, A. B. & Piketty, Thomas (ed.), 2007. "Top Incomes Over the Twentieth Century: A Contrast Between Continental European and English-Speaking Countries," OUP Catalogue, Oxford University Press, number 9780199286881.
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    Cited by:

    1. Blackwell, Calvin, 2018. "Power Laws in Real Estate Prices? Some Evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 69(C), pages 90-98.

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    More about this item

    Keywords

    Inequality; CEO compensation; Power law distribution; Pareto distribution;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

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