Information Technology and the Rise of the Power Law Economy

We show that the dramatically increasing share of income going to top earners is consistent with the rise of the "power law economy" and argue this may reflect networks and increased digitization. Specifically, tax data (1960-2008) show an increasing dispersion of incomes in the portion of the distribution drawn from a power law, as opposed to the long-established log-normal distribution. We present a simple model arguing that the increased role of power laws is consistent with the growth of information technology, because digitization and networks facilitate winner-take-most markets. We generate four testable hypotheses which are supported by the data. (1) Our model fits the data better than a purely lognormal distribution, (2) the increase in the variance of the log-normal portion of the distribution has slowed, consistent with slowing skill-biased technical change, (3) more individuals now select into the power law economy, (4) skewness has increased within that economy.