It has been well known that the exponential distribution is the only continuous distribution that has the memoryless property. Here, we observe that, if the exponential distribution dominates an economy as a probability distribution of income acquisition, then the memoryless property imposes equal opportunities on agents in this economy to acquire earnings. Based on this observation, we propose to identify the emergence of an exponential income distribution as a potential necessary condition for guaranteeing the equality of opportunity. Together with other conditions (such as social and economic mobility), it would promote equal opportunities for income acquisition among citizens. Empirically, we employ the latest data available from four representative market-economy countries (the United Kingdom, the United States, Canada, and China) to demonstrate that the exponential distribution is a stylized feature of the income structure of the low- and middle-income class, which occupies the great majority of populations. By contrast, the top income classes in these countries obey the Pareto distribution. To validate the relationship between exponential distribution and equal opportunity, we empirically show how the income structure of the low- and middle-income class in China (from 1978 to 2015) evolved towards an exponential distribution after the market-oriented economic reformation.

This paper provides attempts to formalize Hayek’s theory of knowledge. It has been theoretically shown that exponential income distribution is a spontaneous order of the well-functioning market economy. We show that this theoretical result is supported by the empirical evidence from the United Kingdom and China. In particular, we empirically show how the income structure of China evolved towards an exponential distribution after the market-oriented economic reformation. Furthermore, we strictly prove that, if the income structure of an economy obeys an exponential distribution, the income summation over all households leads to an aggregate production function with Hicks-neutral-like technical progress, in which the technology factor is exactly equal to society’s information stock that is a result of combining all of decentralized decisions.

We show that an exponential income distribution will emerge spontaneously in a peer-to-peer economic network that shares the publicly available technology. Based on this finding, we identify the exponential income distribution as the benchmark structure of the well-functioning market economy. However, a real market economy may deviate from the well-functioning market economy. We show that the deviation is partly reflected as the invalidity of exponential distribution in describing the super-low income class that involves unemployment. In this regard, we find, theoretically, that the lower-bound u of exponential income distribution has a linear relationship with (per capita) unemployment compensation. In this paper, we test this relationship for the United Kingdom from 2001 to 2015. Our empirical investigation confirms that the income structure of low and middle classes (about 90% of populations) in the United Kingdom exactly obeys exponential distribution, in which the lower-bound u is exactly in line with the evolution of unemployment compensation.

Motivated by empirical observations, we propose a possible extension of Gibrat's law. By applying it into the random growth theory of income distribution (Gabaix, 2009), we find that the income distribution is described by a generalized Pareto-type distribution (GPD) with three parameters. We observe that there is a parameter /elta in the GPD that plays a key role in determining the shape of income distribution. By using the Kolmogorov-Smirnov test, we empirically show that, for typical market-economy countries, /elta is close to 0 significantly, such that the income distribution is characterized by a two-class pattern in which the bottom 90% of the population is approximated by an exponential distribution and the richest 1%~3% is approximated by an asymptotic power law. However, we empirically find that, for China both in planned economy period and in early stages of market reformation (from 1978 to 1990), /elta is significantly deviated from 0, such that the bottom of the population no longer conforms to an exponential distribution.