A Simple Mechanism Causing Wealth Concentration.

Michał Cieśla,Małgorzata Snarska

doi:10.3390/e22101148

Michał Cieśla, Małgorzata Snarska

Open Access

https://doi.org/10.3390/e22101148

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Abstract

We study mechanisms leading to wealth condensation. As a natural starting point, our model adopts a neoclassical point of view, i.e., we completely ignore work, production, and productive relations, and focus only on bilateral link between two randomly selected agents. We propose a simple matching process with deterministic trading rules and random selection of trading agents. Furthermore, we also neglect the internal characteristic of traded goods and analyse only the relative wealth changes of each agent. This is often the case in financial markets, where a traded good is money itself in various forms and various maturities. We assume that agents trade according to the rules of utility and decision theories. Agents possess incomplete knowledge about market conditions, but the market is in equilibrium. We show that these relatively frugal assumptions naturally lead to a wealth condensation. Moreover, we discuss the role of wealth redistribution in such a model.

Highlights

Study of wealth distribution among the population has been labelled as one of the key problems in modern economic theory and is often described by a power-law function known as Pareto distribution [1]
In the last case we did not obtain purely exponential distribution after 1000 cycles, but here, the wealth distribution should converge to an exponential distribution with a growing number of cycles. These results suggest that the wealth condensation was a feature of the model and not of the specific initial wealth distribution among agents
Because the wealth condensation occurred for all studied cases of the initial wealth distribution, we further focused on the case where all agents had an equal lump of money initially, and the population size was 105

Summary

Introduction

Study of wealth distribution among the population has been labelled as one of the key problems in modern economic theory and is often described by a power-law function known as Pareto distribution [1]. The well-studied macro-perspective focuses on the issue of poverty arising from wealth inequalities, its social and economic consequences, where it is typical that a small fraction of the population owns most of the total wealth This approach stems from macroeconomic theory and general equilibrium Micro-foundations of wealth concentration arise from bilateral trade or exchange of goods among two economic agents, where wealth typically is highly related to the individual investment decision process This observation led to several mathematical models attempting to explain this phenomenon, i.e., so-called kinetic wealth exchange models that are based on microeconomic interactions between economic actors who exchange wealth between them over the trade cycle [9]. Lim and Min [15], which share some common features with our approach

Some Stylised Facts Related to Empirical Wealth Distribution

The General Structure of Kinetic Exchange Models

Wealth Condensation

Income and Wealth Tax Influence on the Model

Conclusions