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When incorporating differences in household characteristics, the choice of equivalence scale can affect the ranking of income distributions. An alternative approach was pioneered by A. B. Atkinson and F. Bourguignon (G. R. Feiwel (Ed.), Arrow and the Foundation of the Theory of Economic Policy, Macmillan, New York, 1987), who derive a sequential Lorenz dominance criterion for comparing zistributions with an identical population structure. In order to make their approach applicable to international comparisons, we extend their criterion to the case of different marginal distributions of household types, and derive a sequential stochastic dominance criterion that highlights the importance of first order dominance of the marginal distribution of household characteristics for obtaining consistent rankings of income distributions. Comparisons of distributions are made using the Luxembourg Income Study database for a number of countries.

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.