Entry Costs, Task Variety, and Skill Flexibility: A Simple Theory of (Top) Income Skewness

This paper develops a simple model that provides a unified explanation of the increased skewness of wage income distribution based on differences in flexibility of skills--modeled as differences in the setup costs required to combine/perform a given number of tasks. Our numerical experiments in a calibrated model show that, by increasing task variety, a decrease in the fixed costs of entry due to entry deregulation can be a quantitatively important source of both the increase in below-top skewness and the larger increase in within-top skewness. Moreover, the experiments imply that the observed differences in entry deregulation can cause significant differences in the top skewness across countries that have similar technological change. This can provide an answer to Piketty and Saez's (2006) question.