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When does inequality freeze an economy?

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Listed:
  • Jo~ao Pedro Jerico
  • Franc{c}ois P. Landes
  • Matteo Marsili
  • Isaac P'erez Castillo
  • Valerio Volpati

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.

Suggested Citation

  • Jo~ao Pedro Jerico & Franc{c}ois P. Landes & Matteo Marsili & Isaac P'erez Castillo & Valerio Volpati, 2016. "When does inequality freeze an economy?," Papers 1602.07300, arXiv.org, revised Apr 2016.
    • Handle: RePEc:arx:papers:1602.07300
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