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Was Pareto right? Is the distribution of wealth thick-tailed?

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  • Wildauer, Rafael
  • Heck, Ines
  • Kapeller, Jakob

Abstract

We fit log-normal, exponential, Pareto type I and Pareto type II distributions to US wealth data from 1989 to 2019 and examine the goodness of fit. Unlike earlier literature this paper uses high quality data, covering the entire US population, yielding powerful and unbiased tests. Beyond the 91st percentile the type II distribution consistently provides the best fit to the data and supports the hypothesis of a thick-tailed wealth (and by extension income) distribution. In addition, our results highlight the changing shape of the tail with decreasing concentration up to the 98th percentile and increasing concentration beyond. Our results suggest that practitioners modelling the distribution of wealth in situations where only limited data is available, a type I Pareto distribution might still serve as a valuable bias correction tool but should only be fitted to the top 1% of the population.

Suggested Citation

  • Wildauer, Rafael & Heck, Ines & Kapeller, Jakob, 2023. "Was Pareto right? Is the distribution of wealth thick-tailed?," Greenwich Papers in Political Economy 38597, University of Greenwich, Greenwich Political Economy Research Centre.
    • Handle: RePEc:gpe:wpaper:38597
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    More about this item

    Keywords

    D31 personal income; wealth; and their distributions; C46 specific distributions; C81 data estimation methodology;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access

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