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Power Laws in Economics and Finance

Gabaix, Xavier·2009·Annual Review of Economics
DOI 10.1146/annurev.economics.050708.142940
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Abstract

A power law (PL) is the form taken by a large number of surprising empirical regularities in economics and finance. This review surveys well-documented empirical PLs regarding income and wealth, the size of cities and firms, stock market returns, trading volume, international trade, and executive pay. It reviews detail-independent theoretical motivations that make sharp predictions concerning the existence and coefficients of PLs, without requiring delicate tuning of model parameters. These theoretical mechanisms include random growth, optimization, and the economics of superstars, coupled with extreme value theory. Some empirical regularities currently lack an appropriate explanation. This article highlights these open areas for future research.

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  • The exponent α ≈ 2.0 is closer to concentrated capital income (α ≈ 1.5) than to labor income.

    “This places creator earnings closer to concentrated capital income ( α ≈ 1 . 5) (Gabaix 2009; Rishabh Kumar 2024) than to labor income, suggesting multiplicative and compounding effects drive online creator earnings (Strauss et al. 2024).”

    From "Rich-Get-Richer"? Platform Attention and Earnings Inequality using Patreon Earnings Data (2025) · cites this paper as Gabaix 2009

  • In the digital realm, each new click or view is more likely to go to creators who already have substantial visibility, resulting in a 'rich-get-richer' dynamic commonly observed on platforms governed by algorithmic curation.

    “In the digital realm, each new click or view is more likely to go to creators who already have substantial visibility, resulting in a 'rich-get-richer' dynamic commonly observed on platforms governed by algorithmic curation (Barabasi 2005; Jackson et al. 2008; Gabaix 2009; Vidal et al. 2011; Easley, J. Kleinberg, et al. 2010; Barabási et al. 2011; Barbosa et al. 2018).”

    From "Rich-Get-Richer"? Platform Attention and Earnings Inequality using Patreon Earnings Data (2025) · cites this paper as Gabaix 2009

  • Participants who accumulate more engagement become even more likely to attract future interactions.

    “This compounding of initial advantage, also called a 'superstar effect' in economics (Gabaix 2009; Autor et al. 2020), means that participants who accumulate more engagement become even more likely to attract future interactions.”

    From "Rich-Get-Richer"? Platform Attention and Earnings Inequality using Patreon Earnings Data (2025) · cites this paper as Gabaix 2009

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Metadata

Authors
Gabaix, X.
Affiliations
Stern School, New York University, New York, NY 10012;
Venue
Annual Review of Economics
Publisher
Annual Reviews
Published
2009-09
Volume
1
Issue
1
Pages
255-294
ISSN
  • 1941-1383
  • 1941-1391
DOI
10.1146/annurev.economics.050708.142940
Cited by
907
References
5
Language
en

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