Power Laws in Economics and Finance

Posted: 4 Jun 2010

See all articles by Xavier Gabaix

Xavier Gabaix

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

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Date Written: January 2009

Abstract

A power law (PL) is the form taken by a large number of surprising empirical regularities in economics and finance. This review surveys well-documented empirical PLs regarding 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 PLs, 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 empirical regularities currently lack an appropriate explanation. This article highlights these open areas for future research.

Suggested Citation

Gabaix, Xavier, Power Laws in Economics and Finance (January 2009). Available at SSRN: https://ssrn.com/abstract=1594441 or http://dx.doi.org/10.1146/annurev.economics.050708.142940

Xavier Gabaix (Contact Author)

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