Wealth Inequality and the Ergodic Hypothesis: Evidence from the United States

35 Pages Posted: 13 Jun 2016 Last revised: 26 Nov 2019

See all articles by Yonatan Berman

Yonatan Berman

London Mathematical Laboratory

Ole Peters

London Mathematical Laboratory; Santa Fe Institute

Alexander Adamou

London Mathematical Laboratory

Date Written: November 25, 2019

Abstract

Studies of wealth inequality often make the ergodic hypothesis that rescaled wealth converges rapidly to a stationary distribution. Changes in distribution are expressed as changes in model parameters, corresponding to shocks in economic conditions. Here we test the validity of the ergodic hypothesis in an established model of wealth in a growing economy with reallocation. We fit model parameters to historical data from the United States. In recent decades, we find negative reallocation rates, i.e. from poorer to richer, for which no stationary distribution exists. When we find positive reallocation, convergence to the stationary distribution is too slow for the distribution to be practically relevant. Inequality evolves because the distribution is inherently unstable on human timescales, irrespective of shocks. Our analysis is informative of net reallocation in the United States economy. It does not support use of the ergodic hypothesis in this model for these data. Studies of other models and data, in which the hypothesis is made, would benefit from similar tests.

Keywords: Wealth inequality, Wealth dynamics, Ergodic hypothesis, Stochastic processes

JEL Classification: C1, D3, G5

Suggested Citation

Berman, Yonatan and Peters, Ole and Adamou, Alexander, Wealth Inequality and the Ergodic Hypothesis: Evidence from the United States (November 25, 2019). Available at SSRN: https://ssrn.com/abstract=2794830 or http://dx.doi.org/10.2139/ssrn.2794830

Yonatan Berman (Contact Author)

London Mathematical Laboratory

8 Margravine Gardens
London, London W6 8RH
United Kingdom

Ole Peters

London Mathematical Laboratory ( email )

14 Buckingham St
London, WC2N 6DF
United Kingdom

Santa Fe Institute ( email )

1399 Hyde Park Road
Santa Fe, NM 87501
United States

HOME PAGE: http://tuvalu.santafe.edu/~ole/

Alexander Adamou

London Mathematical Laboratory ( email )

14 Buckingham St
London, WC2N 6DF
United Kingdom

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