I’ve been waiting for a paper like this

Steve Kaplan and Joshua Rauh write:

We consider how much of the top end of the income distribution can be
attributed to four sectors — top executives of non-financial firms
(Main Street); financial service sector employees from investment
banks, hedge funds, private equity funds, and mutual funds (Wall
Street); corporate lawyers; and professional athletes and celebrities. 
Non-financial public company CEOs and top executives do not represent
more than 6.5% of any of the top AGI brackets (the top 0.1%, 0.01%,
0.001%, and 0.0001%).  Individuals in the Wall Street category comprise
at least as high a percentage of the top AGI brackets as non-financial
executives of public companies.  While the representation of top
executives in the top AGI brackets has increased from 1994 to 2004, the
representation of Wall Street has likely increased even more.  While the
groups we study represent a substantial portion of the top income
groups, they miss a large number of high-earning individuals.  We
conclude by considering how our results inform different explanations
for the increased skewness at the top end of the distribution.  We argue
the evidence is most consistent with theories of superstars, skill
biased technological change, greater scale and their interaction.

Here is the link, here is the non-gated version.  How about this bit from the text?:

…the top 25 hedge fund managers combined appear to have earned more than all 500 S&P 500 CEOs combined (both realized and estimated).

This is important too:

…we do not find that the top brackets are dominated by CEOs and top executives who arguably have the greatest influence over their own pay.  In fact, on an ex ante basis, we find that the representation of CEOs and top executives in the top brackets has remained constant since 1994.  Our evidence, therefore, suggests that poor corporate governance or managerial power over shareholders cannot be more than a small part of the picture of increasing income inequality, even at the very upper end of the distribution.  We also discuss the claim that CEOs and top executives are not paid for performance relative to other groups.  Contrary to this claim, we find that realized CEO pay is highly related to firm industry-adjusted stock performance.  Our evidence also is hard to reconcile with the arguments in Piketty and Saez (2006a) and Levy and Temin (2007) that the increase in pay at the top is driven by the recent removal of social norms regarding pay inequality.  Levy and Temin (2007) emphasize the importance of Federal government policies towards unions, income taxation and the minimum wage.  While top executive pay has increased, so has the pay of other groups, particularly Wall Street groups, who are and have been less subject to disclosure and social norms over a long period of time.  In addition, the compensation arrangements at hedge funds, VC funds, and PE funds have not changed much, if at all, in the last twenty-five or thirty years (see Sahlman (1990) and Metrick and Yasuda (2007)).  Furthermore, it is not clear how greater unionization would have suppressed the pay of those on Wall Street.  In other words, there is no evidence of a change in social norms on Wall Street.  What has changed is the amount of money managed and the concomitant amount of pay.

There is a great deal of analysis and information (though to me, not many surprises) in this important paper.  The authors also find no link between higher pay and the relation of a sector to international trade.


A very nice paper, with lots of information. The key table, in my opinion, is 8a. So, who are all the other people in these upper income brackets that are not executives, lawyers, athletes, or entertainers?

The groups that seem to be missing to me are doctors, private business owners and partners, private investors, non-executive employees. Am I missing any other important groups?

I have mixed feelings on the hedgies. First, given their secrecy, they have all sorts of ways of making secret bribes to get political favors flowing their way.

Second, they have all sorts of ways of earning fat fees from suckering investors into moronic investments that have a high probability of high returns, and a low probability of total flaming disaster, to a point where the investment actually has poor expected value. I guess that aspect will prove self-correcting in time, but not before they've stolen quite a lot from gullible greedy investors. Maybe there's some justice, but that aspect is clearly socially wasteful.

The fact that C-level execs are not the numerically dominant subgroup is pretty obvious. The whole link between exec compensation and inequality is a red herring (except in that it symbolizes our acceptance of winner take all economics).

I suspect that founders and early employees of successful private companies (startups) that have a liquidity event (i.e., an IPO or acquisition) are a large subset of the top AGI group. Note, though, that this population does not make it into the top tier (i.e., top 1 or .1%) with regularity, but rather only in a very successful year (the one in which they get their "exit"). Any decent tech IPO launches hundreds of employees into the top 1 or even .1%.

It is very important to know what fraction of the top group are there each year (doctors, lawyers, financiers) versus those for whom it is a one-time event (sold the business they carefully built over many years). If it is predominantly the latter it's hard to attribute an increase in top percentile earnings to unhealthy inequality.

Perhaps also of interest:

Data on incomes by county covering the mid to late 1990's, from the government Bureau of Economic Analysis, shows an interesting geographical pattern. Most of the gains enjoyed by the top 1% came from a small number of counties. In particular, income increases at the top end in tech hotbeds Seattle and Silicon Valley, and finance capital New York City, account for almost all of the aggregate nationwide increase. If four counties in those regions are removed, there is almost no increase in inequality during that period.

So I guess it's not due to doctors and sports stars, and very likely (for startup employees), the payouts are not going to the *same* people each year.


How are S corporations accounted for in income statistics like these?

The figure I quoted is all shares, not just IPOs and obviously the value of IPOs would fluctuate much more than the total. But the point that the value of total shares is a consistent share of personal income as far back as the data goes -- the late 1980s -- implies that it is not a factor explaining the shift in income inequality. But to really demonstrate that I would need data from earlier periods.

What you are arguing is that the value of cash-outs through IPOs has increased significantly in recent years. The point that the market grew faster than GDP in the 1980s and 1990s would support that, but there is also good research that shows CEOs income stayed fairly constant as a share of stock market capitalization over this era.

My question is, are there any studies of the value of new cash-outs that would show how this has changed over time? In other words, do you have any data to support the thesis that cash-outs play a significant role in growing income inquality?

steve-- I'm not saying you are wrong. Just asking for the data.

On your last point, the question ought to be about wealth vs income. I'm sure the list of top wealth holders is much more stable than the list of top income receivers. But wealth is also much more concentrated than income.

But that is true of the entire debate on inequality. We use income because we have good data on income. But if we are looking at inequality shouldn't wealth be the more important variable.

stock options & perks! did those two things get taken into account?

The problem is that their wealth gives them exceptional political power. Just 18 of these families have been responsible for the bulk of the spending on abolition of the estate tax over the past decade or so. Collectively they have spent over $100 million funding think tanks, influencing politicians and through other indirect means.

How are S corporations accounted for in income statistics like these?

Comments for this post are closed