DETERMINATION OF PARETO EXPONENTS IN ECONOMIC MODELS DRIVEN BY MARKOV MULTIPLICATIVE PROCESSES

This article contains new tools for studying the shape of the stationary distribution of sizes in a dynamic economic system in which units experience random multiplicative shocks and are occasionally reset. Each unit has a Markov-switching type, which influences their growth rate and reset probability. We show that the size distribution has a Pareto upper tail, with exponent equal to the unique positive solution to an equation involving the spectral radius of a certain matrix-valued function. Under a nonlattice condition on growth rates, an eigenvector associated with the Pareto exponent provides the distribution of types in the upper tail of the size distribution.