Abstract
In many economies, wealth is strikingly concentrated. Entrepreneurs–individuals with ownership in for-profit enterprises–comprise a large portion of the wealthiest individuals, and their behavior may help explain patterns in the national distribution of wealth. Entrepreneurs are less diversified and more heavily invested in their own companies than is commonly assumed in economic models. We present an intentionally simplified individual-based model of wealth generation among entrepreneurs to assess the role of chance and determinism in the distribution of wealth. We demonstrate that chance alone, combined with the deterministic effects of compounding returns, can lead to unlimited concentration of wealth, such that the percentage of all wealth owned by a few entrepreneurs eventually approaches 100%. Specifically, concentration of wealth results when the rate of return on investment varies by entrepreneur and by time. This result is robust to inclusion of realities such as differing skill among entrepreneurs. The most likely overall growth rate of the economy decreases as businesses become less diverse, suggesting that high concentrations of wealth may adversely affect a country's economic growth. We show that a tax on large inherited fortunes, applied to a small portion of the most fortunate in the population, can efficiently arrest the concentration of wealth at intermediate levels.
Highlights
The distribution of wealth is a fundamental property of how society is structured and has myriad economic, political, and social implications
Empirical patterns of wealth distribution show greater concentration of wealth than is predicted by current economic models, and this wealth is disproportionately concentrated in the hands of wealthy entrepreneurs
Our analysis demonstrates that an inexorable effect of chance can lead to unlimited concentrations of wealth in the hands of a few
Summary
The distribution of wealth is a fundamental property of how society is structured and has myriad economic, political, and social implications. We analyze whether a simple individual-based stochastic model that includes compounding returns can generate the highly concentrated wealth distribution observed among entrepreneurs in real populations. N) invests their capital and earns a return rate, ri,k, that is randomly drawn from a normal distribution with mean m and variance s2.
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