Emergence of income inequality: Origin, distribution and possible policies

Abstract

Wealth and income inequality has attracted intensive interest in recent years due to its great significance both in reality and theory. Inspection on individual behaviors in a microscopic view would be useful in clarifying possible reasons for inequality and proper policies for reducing inequality and poverty. This paper presents an inhomogeneous agent-based model to explore the emergence of income inequality, in which individuals with varied qualities work, consume and invest. In despite of the small attribute difference for individuals, large income/wealth inequality and class differentiation naturally occur through a mechanism of capital (investment) income, which shares some analogy to the endogenous growth. The obtained income distribution is well described with an exponential law at smaller values and a power law at large values. Education, which is modeled as increasing the average productivity and decreasing the productivity width, is able to improve the equality and lower the Gini coefficient. The uplift of salary level hampers the speed of investment (industrialization) and the short-term income, but it brings long-term benefits of higher efficiency and equality. These results support the potential capacity of the model as a basic and open framework to investigate multifarious questions regarding income inequality.