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Efficient Minimum Distance Estimation of Pareto Exponent from Top Income Shares

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Document pages: 26 pages

Abstract: We propose an efficient estimation method for the income Pareto exponent whenonly certain top income shares are observable. Our estimator is based on theasymptotic theory of weighted sums of order statistics and the efficientminimum distance estimator. Simulations show that our estimator has excellentfinite sample properties. We apply our estimation method to U.S. top incomeshare data and find that the Pareto exponent has been stable at around 1.5since 1985, suggesting that the rise in inequality during the last threedecades is mainly driven by redistribution between the rich and poor, not amongthe rich.

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