We provide a Bayesian inference for a mixture of two Pareto distributions which is then used to approximate the upper tail of a wage distribution. The model is applied to the data from the CPS Outgoing Rotation Group to analyze the recent structure of top wages in the United States from 1992 through 2009. We find an enormous earnings inequality between the very highest wage earners (the “superstars”), and the other high wage earners. These findings are largely in accordance with the alternative explanations combining the model of superstars and the model of tournaments in hierarchical organization structure. The approach can be used to analyze the recent pay gaps among top executives in large firms so as to exhibit the “superstar” effect.
We are grateful to Anthony Atkinson and Stephen Bazen for pointing out several references, data sources and providing stimulating comments. We benefited also from comments of Karim Abadir and Christian Robert. We thank an anonymous referee for constructive comments. Of course, the usual disclaimers apply.
Ndoye, A.A. and Lubrano, M. (2014), "Tournaments and Superstar Models: A Mixture of Two Pareto Distributions", Economic Well-Being and Inequality: Papers from the Fifth ECINEQ Meeting (Research on Economic Inequality, Vol. 22), Emerald Group Publishing Limited, Bingley, pp. 449-479. https://doi.org/10.1108/S1049-258520140000022015
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