!
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
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
! 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?
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
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
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
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
Influence of top income earners
on politics