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Has the increasing income inequality in the US been triggered by the

deregulation of the financial sector over the last 40 years?

Final Thesis Project Rafael Neira E.

Bachelor in Business Administration IE University

December 2014

Agenda

•  Introduction & Methodology

•  Background

•  Research Question

•  Results and Further Studies

•  Conclusions

Income Inequality

Methodology

•  American Economic Association

•  Cambridge University Press

•  Oxford University Press

•  Paris School of Economics

•  “Capital on the 21st Century” Thomas Piketty

Background

International Perspective

What drives the increase in income?

Composition of incomes

1

2

3

International Perspective

International Perspective

!  Top 1% of population in the US

!  Composed mainly by top earners in the Financial Sector

!  Approach: Review the allocation and compensation of human capital in the U.S finance industry

What is driving top incomes?

What is driving top incomes?

Piketty (2013)

Has the composition of income changed?

Has the composition of income changed?

Hypothesis

1.  Technologic innovation and globalization

2.  Rent extraction by top executives

3.  Low top marginal tax rates

Deregulation of finance

sector

Increase in income inequality

1. Technologic innovation & Globalization

Technologic innovation & Globalization

!  Combination of increasing technology and returns to skill

!  Skill-biased technological change

!  Importance of IT and innovation relative to deregulation of finance sector

Technologic innovation & Globalization

Philippon & Reshef (2013)

Technologic innovation & Globalization

Philippon & Reshef (2013)

2. Rent Extraction by top executives

Rents: The difference between income received and the income that could have been necessary to make workers in top firms supply their labor or capital.

Rent Extraction by top executives

Rent Extraction by top executives

!  Real compensation arrangements for CEOs are camouflaged

!  US CEO compensation in 2003: 3 times that of other advanced nations

!  Deregulation of corporations in the US = manipulation of executive pay

Rent Extraction by top executives

Philippon & Reshef (2013)

3. Falling top marginal tax rates

Falling top marginal tax rates

Piketty & Saez (2013)

Falling top marginal tax rates

Piketty & Saez (2013)

Falling top marginal tax rates

Growth?

Piketty, Saez, and Stantcheva (2011)

Implications

Implications

Policy measures

•  Attacking Rents: Regulation of financial sector

•  Increasing top marginal tax rates

Conclusions

•  Advanced countries don’t show same pattern in top income shares despite tech. innovation and globalization.

•  Excess wages in top firms (financial sector) are a result of institutional arrangements, not a result of well functioning markets.

•  High marginal taxes: a brake released during deregulation of financial sector.

•  Same growth rate despite variations in tax policies.

Further analysis for future studies

The real value added to society by the financial

sector

Further analysis for future studies

The real value added to society by the financial

sector

Influence of top income earners

on politics

Thank You

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Q & A