 Pareto top shares and the 80/20 rule

For a nonnegative random variable with finite positive mean, the share of its total amount carried by the largest fraction $q$ of outcomes can be defined by dividing their contribution to the expected value by the whole expected value. For a Pareto distribution, let $0<q\le 1$ and choose $x_q=\beta q^{-1/\alpha }$, so that $\mathbb{P}(X\ge x_q)=q$. If $\alpha >1$, direct integration givesThis is a share of amount, distinct from the fraction of outcomes. It depends on $\alpha$, but not on the unit of measurement $\beta$.^[ref]

For the chosen $\alpha =2$, the top 20% starts at $x_{0.2}=10\sqrt{5}\simeq 22.361$ and carries $T(0.2)=\sqrt{0.2}\simeq 44.72\%$ of the amount. To make the top 20% carry exactly 80%, solveThe resulting Pareto distribution has a finite mean and infinite variance. The 80/20 rule selects one shape parameter; it is not a universal law, or even a property of every Pareto distribution. For $\alpha \le 1$, the population-share definition above is unavailable because its denominator is infinite; substituting such an $\alpha$ into the finite-mean formula is invalid.

The left panel compares three quantiles in units of the minimum. The right panel shows $T(0.2)$ only where the mean is finite, and marks the chosen 80/20 value. The thresholds $\alpha =1$ and $\alpha =2$ separate the moment regimes; they do not separate valid and invalid probability distributions.

A straight-looking empirical log-log plot does not by itself establish a Pareto distribution or a reliable tail exponent; estimating an exponent and assessing goodness of fit are separate tasks.^[ref] If a Pareto distribution is used only above a fitted lower threshold, $T(q)$ describes that conditional tail population, not automatically the whole population. A genuine finite upper cutoff gives a truncated distribution with finite nonnegative moments; its survival function, quantiles and top shares must be recalculated. Truncation is a modelling change, distinct from merely observing a finite sample. None of the chosen numbers here estimates an actual wealth distribution.