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Pareto extrapolation: An analytical framework for studying tail inequality

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  • Émilien Gouin‐Bonenfant
  • Alexis Akira Toda

Abstract

We develop an analytical framework designed to solve and analyze heterogeneous‐agent models that endogenously generate fat‐tailed wealth distributions. We exploit the asymptotic linearity of policy functions and the analytical characterization of the Pareto exponent to augment the conventional solution algorithm with a theory of the tail. Our framework allows for a precise understanding of the very top of the wealth distribution (e.g., analytical expressions for top wealth shares, type distribution in the tail, and transition probabilities in and out of the tail) in addition to delivering improved accuracy and speed.

Suggested Citation

  • Émilien Gouin‐Bonenfant & Alexis Akira Toda, 2023. "Pareto extrapolation: An analytical framework for studying tail inequality," Quantitative Economics, Econometric Society, vol. 14(1), pages 201-233, January.
    • Handle: RePEc:wly:quante:v:14:y:2023:i:1:p:201-233
    DOI: 10.3982/QE1817
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    2. Yang, C.C. & Zhao, Xueya & Zhu, Shenghao, 2023. "Tax progressivity and the Pareto tail of income distributions," Economics Letters, Elsevier, vol. 231(C).

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