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Power Laws in Economics and Finance

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  • Xavier Gabaix

Abstract

A power law is the form taken by a large number of surprising empirical regularities in economics and finance. This article surveys well-documented empirical power laws concerning income and wealth, the size of cities and firms, stock market returns, trading volume, international trade, and executive pay. It reviews detail-independent theoretical motivations that make sharp predictions concerning the existence and coefficients of power laws, without requiring delicate tuning of model parameters. These theoretical mechanisms include random growth, optimization, and the economics of superstars coupled with extreme value theory. Some of the empirical regularities currently lack an appropriate explanation. This article highlights these open areas for future research.

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  • Xavier Gabaix, 2008. "Power Laws in Economics and Finance," NBER Working Papers 14299, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:14299
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    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • F1 - International Economics - - Trade
    • G1 - Financial Economics - - General Financial Markets
    • R0 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General

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