The Application of the Theory of Power Law Distributions to U.S. Wealth Accumulation

In the recent literature on the dynamics of the distribution of wealth in the U.S. two empirical results have received considerable attention. First, that wealth is distributed according to a power law distribution at high wealth levels. Second, that wealth inequality has intensified over the past two decades (Weicher, 1997; Wolff, 1998; Rodriguez et al., 2002). Notwithstanding the focus on these issues, there is a lack of consensus surrounding the theoretical explanation of a power law distribution of wealth. Also, the choice of estimation technique of parameters for power law distributions is not a straightforward exercise (Brazauskas and Serfling, 2000). In this paper we examine the robustness of the power law characterization of the wealth distribution at different wealth intervals based on wealth data obtained from the 2001 Survey of Consumer Finances. Household incomes are also fit to the power law model. In addition, we examine whether the exponent of the power law distribution displays an upward or downward pattern based on a comparison of the power law parameters obtained from the 1998 and 2001 Survey of Consumer Finances (SCF). The aim of this paper is threefold: first, to determine the appropriateness of modeling SCF wealth data using a power law distribution, second, to test the hypothesis that there has been no change in the distribution of household wealth and third, to test the hypothesis that there is no difference in the distribution between