Abstract
Pareto cautiously asserted that the wealth and income distributions which bear his name are universal, basing his argument on observations of this distribution in many different types of economies. In this paper, we present an agent based model (and a scalable approximation of it) in a closely related spirit. The central feature of this model is that wealth enables an individual to secure more wealth. Specifically, the important and novel feature of this model is its ability to simultaneously produce both the Pareto distribution observed in empirical data for the top 10% of the population and the exponential distribution observed for the lower 90%. We show that the model produces these distributions of wealth when initialized with an equitable distribution. Then, using historical data, we initialize the model with US wealth shares in 1988 and show that the model tracks wealth share changes from 1988 to 2012. Simulations to 2088 project that the top 0.01% of the population will possess more than 70% of the total wealth in the economy.
Highlights
The Pareto distribution was first discovered by Vilfredo Pareto in the late 19th century (Chipman 1976; Persky 1992)
Regardless of how an economy is structured, the wealth and income distributions among the upper tier of the population follow a power law, which came to be known as a Pareto distribution (Jones 2015)
The underlying assumption of the model is in accordance with Pareto’s view that human nature, and in particular our innate tendency to use our resources to improve our own position, is sufficient to generate an uneven distribution of wealth
Summary
The Pareto distribution was first discovered by Vilfredo Pareto in the late 19th century (Chipman 1976; Persky 1992). Where Tω is the “wealth temperature” and c is a normalizing constant These exponential and Pareto distributions fit to observed wealth distributions in the United Kingdom (UK) are illustrated, which is taken from Dragulescu and Yakovenko (2001). While Piketty’s work focuses almost exclusively on the Pareto distribution of wealth, a variety of econophysical models, which rely extensively on descriptions of stock market transactions (Yakovenko and Rosser 2009), either produce a distribution characteristic of the exponential distribution, or a power law, but not both. The model’s free parameter is calibrated to reproduce the observed distribution of wealth in the United States (US) from the period between 1988 and 2012 Projections with this model to 2088 produce a striking separation between the shrinking minority of super-rich and everyone else
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