The Spillover Effects of Top Income Inequality

Since the 1980s top income inequality (both the share of income held by top earners and inequality among them) has risen sharply. Common explanations for this phenomenon tend to rely on common shocks such as superstars effects, globalization, or technological progress that sharply increase the returns to being most talented. Yet these explanations struggle to explain increases in top income inequality for occupations where output is not easily scalable, such as doctors, dentists, and realtors. This project will show how an increase in top income inequality in some occupations can spill over to others through inequality in top earners' willingness to pay for quality. A theoretical model, in which doctors produce health services that are not divisible or scalable, leads to an equilibrium where the best doctors are matched with the richest individuals. This model will be tested using Census data on income inequality by profession and location, and medical claims data to examine inequality in the prices doctors charge for identical services. A Bartik-style instrument will allow me to obtain causal estimates of how general income inequality spills over into inequality for doctors and similar professions.