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Finite market size as a source of extreme wealth inequality and market instability

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  • Huang, Zhi-Feng
  • Solomon, Sorin
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    Abstract

    We study the finite-size effects in some scaling systems, and show that the finite number of agents N leads to a cut-off in the upper value of the Pareto law for the relative individual wealth. The exponent α of the Pareto law obtained in stochastic multiplicative market models is crucially affected by the fact that N is always finite in real systems. We show that any finite value of N leads to properties which can differ crucially from the naive theoretical results obtained by assuming an infinite N. In particular, finite N may cause in the absence of an appropriate social policy extreme wealth inequality α<1 and market instability.

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    Bibliographic Info

    Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

    Volume (Year): 294 (2001)
    Issue (Month): 3 ()
    Pages: 503-513

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    Handle: RePEc:eee:phsmap:v:294:y:2001:i:3:p:503-513

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    Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

    Related research

    Keywords: Power law; Multiplicative process; Cut-off; Finite-size effect;

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    Cited by:
    1. Marco Raberto & Silvano Cincott & Sergio M. Focardi & Michele Marchesi, 2002. "Traders’ long-run wealth in an artificial financial market," Computing in Economics and Finance 2002 301, Society for Computational Economics.
    2. A. Corcos & J. -P. Eckmann & A. Malaspinas & Y. Malevergne & D. Sornette, 2001. "Imitation and contrarian behavior: hyperbolic bubbles, crashes and chaos," Papers cond-mat/0109410, arXiv.org.
    3. Marco Airoldi & Vito Antonelli & Bruno Bassetti & Andrea Martinelli & Marco Picariello, 2004. "Long Range Interaction Generating Fat-Tails in Finance," GE, Growth, Math methods 0404006, EconWPA, revised 27 Apr 2004.
    4. Sorin Solomon & Natasa Golo, 2014. "Microeconomic Structure determines Macroeconomic Dynamics. Aoki defeats the Representative Agent," Papers 1401.7496, arXiv.org.

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