Monday, July 23, 2007

Steve Kaplan and Joshua D. Rauh have a fascinating paper on the very upper tail of the income distribution.

I met Steve Kaplan in 1978. Now Matt Yglesias (who was not born yet then) links to him. I have long had the impression that Yglesias and many others (including Picketty and Saez) overestimate the role of CEO compensation in the increased incomes of the super rich and now Kaplan and Rauh note the wonderful fact that "the top 25 hedge fund managers combined appear to have earned more than all 500 S&P 500 CEOs combined (both realized and estimated)."

Now I have read the introduction to the paper. Clearly a lot of the analysis of income of people other than corporate officers involves strong assumptions and very little data. However, the comparison of CEO compensation and the top tail of the income distribution is pretty solid and they conclude that CEOs of nonfinancial corporations are 2% to 6.4 % of people in the very top income brackets (top 0.001% and 0.0001%). This isn't really a surprise. Total compensation of CEOs of fortune 500 firms is less than $6 billion, not something which Everet Dirkson would consider real money. They get a lot of heat as they have to report to shareholders, but they are not many of the super rich.

The most striking feature of the introduction to the paper is that Kaplan and Rauh have no guess who most of the super rich are. They (try to) look at CEOs of non financial firms, financial service sector employees from investment banks, hedge funds, private equity partnerships and mutual funds, corporate lawyers, athletes and celebrites. They find (estimate guess ?) that they have found about 15% to 26.5% of hte people in quantiles top 0.1% and above. Who are the others ? They guess (total guess now) that they might be "trial lawyers, ececutives of privately held companies, highly paid doctors and independently wealthy individuals" hmmm. I'd guess that there aren't many doctors paid that much. Trial lawyers can be estiamated (they never get more than 33% of huge settlements which are rare and public). My guess is that there are a lot of rentiers (independently wealthy). Consider the Forbes 500 (wealth not income). A lot of them are hiers and a lot more are people who owned land in areas which then became cities. Huge wealth times reasonable management of that wealth implies huge income.

Anyway the message "It's mostly not CEOs" is solid (actually it was before the paper was written) and they did a huge amount of important work which I didn't even read.

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