When Does Inequality Freeze an Economy?

21 Pages Posted: 23 Apr 2016

See all articles by João Jerico

João Jerico

University of São Paulo (USP)

Francois Landes

Abdus Salam International Centre for Theoretical Physics (ICTP)

Matteo Marsili

Abdus Salam International Centre for Theoretical Physics (ICTP)

Isaac Perez Castillo

National Autonomous University of Mexico (UNAM)

Valerio Volpati

Capital Fund Management

Date Written: April 21, 2016

Abstract

Inequality and its consequences are the subject of intense recent debate. Using a simplified model of the economy, we address the relation between inequality and liquidity, the latter understood as the frequency of economic exchanges. Assuming a Pareto distribution of wealth for the agents, that is consistent with empirical findings, we find an inverse relation between wealth inequality and overall liquidity. We show that an increase in the inequality of wealth results in an even sharper concentration of the liquid financial resources. This leads to a congestion of the flow of goods and the arrest of the economy when the Pareto exponent reaches one.

Keywords: Inequality, Wealth, Liquidity

Suggested Citation

Jerico, João and Landes, Francois and Marsili, Matteo and Perez Castillo, Isaac and Volpati, Valerio, When Does Inequality Freeze an Economy? (April 21, 2016). Available at SSRN: https://ssrn.com/abstract=2768144 or http://dx.doi.org/10.2139/ssrn.2768144

João Jerico

University of São Paulo (USP) ( email )

Brazil

Francois Landes

Abdus Salam International Centre for Theoretical Physics (ICTP) ( email )

Strada Costiera 11
Trieste, 34151
Italy

Matteo Marsili

Abdus Salam International Centre for Theoretical Physics (ICTP) ( email )

Strada Costiera 11
Trieste, 34014
Italy

Isaac Perez Castillo

National Autonomous University of Mexico (UNAM) ( email )

Circuito Mario de la Cueva s/n
Lomas de las Palmas, 52760
Mexico

Valerio Volpati (Contact Author)

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

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