Tuesday, November 28, 2017
Joshua Gottlieb (British Columbia) presents The Spillover Effects of Top Income Inequality (with Jeffrey Clemens (UC-San Diego), David Hemousat (Zurich) & Morten Olsen (Copenhagen)) at Columbia today as part of its Davis Polk & Wardwell Tax Policy Colloquium Series hosted by Alex Raskolnikov and Wojciech Kopczuk:
Top income inequality in the United States has increased considerably within occupations as diverse as bankers, managers, doctors, lawyers and scientists. The breadth of this phenomenon has led to a search for a common explanation. We show instead that increases in income inequality originating within a few occupations can “spill over” into others, driving broader changes in income inequality.
We develop an assignment model where consumers with heterogeneous income buy services from doctors with heterogeneous ability. In equilibrium the highest-earning consumers match with the highest-ability doctors. Increases in income inequality among the consumers feed directly into the doctors’ income inequality. To test our theory, we identify occupations for which our consumption-driven theory predicts spillovers and occupations for which it does not. Using a Bartik-style instrument, we show that an increase in general income inequality causes higher income inequality for doctors, dentists and real estate agents, and in fact accounts for most of the increases in inequality within these occupations. Physician pricing and insurance network data support our mechanism.