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  4. Winter 2016
  5. Power Laws in Economics: An Introduction

Power Laws in Economics: An Introduction

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Abstract

Many of the insights of economics seem to be qualitative, with many fewer reliable quantitative laws. However a series of power laws in economics do count as true and nontrivial quantitative laws—and they are not only established empirically, but also understood theoretically. I will start by providing several illustrations of empirical power laws having to do with patterns involving cities, firms, and the stock market. I summarize some of the theoretical explanations that have been proposed. I suggest that power laws help us explain many economic phenomena, including aggregate economic fluctuations. I hope to clarify why power laws are so special, and to demonstrate their utility. In conclusion, I list some power-law-related economic enigmas that demand further exploration.

Citation

Gabaix, Xavier. 2016. "Power Laws in Economics: An Introduction." Journal of Economic Perspectives, 30 (1): 185-206. DOI: 10.1257/jep.30.1.185

Additional Materials

JEL Classification

  • D01 Microeconomic Behavior: Underlying Principles
  • R11 Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
  • L11 Production, Pricing, and Market Structure; Size Distribution of Firms

Power laws from randomness

  • Posted by FIONA MACLACHLAN
  • Posted on 3/6/2016 12:23:09 PM
Another explanation for apparent power laws is random division. Consider a line of unit length. Select n random numbers between 0 and 1 and use them to partition the line into n+1 segments. For a large n, the size distribution of the segments follows a power law shape.
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