Persistence of wealth inequality from network effects

Addressing wealth and income inequality requires a thorough understanding of the mechanisms driving these disparities. Agent-Based Models (ABMs) offer a powerful tool for simulating these complex systems, capturing the intricate interplay of individual behaviors and emergent macroeconomic trends. Here we consider two existing ABM classes: one, exemplified by the Nirei-Souma (NS) model, which simulates how individuals accumulate wealth through income from work, returns on investments, and consumption, and the other, represented by the Bouchaud-Mezard (BM) model, which emphasizes the role of wealth exchanges and random returns in shaping the wealth distribution. Drawing on empirical evidence of wealth and income distribution in Italy, we benchmark both models revealing that they effectively captures Pareto-like wealth distribution, but fail to fully account for the persistent lack of social mobility observed in empirical data. To overcome this limitation, we propose an interacting version of the NS model, integrating it with wealth exchange mechanisms. Through this interacting model, we can show the influence of network topology on wealth distribution and dynamics. Simulations on hierarchical networks yield results that align more closely with empirical observations compared to regular random graphs, highlighting the importance of hierarchical interactions in shaping wealth inequality and social mobility. The model is further analyzed to reveal the interplay between income sources and wealth accumulation.Author summary: In most countries, a small fraction of the population controls a disproportionate share of wealth leading to large social disparities. Large wealth inequality tend to be also persistent, with little mobility between different classes. In this work, we investigate basic mechanisms leading to a persistent wealth inequality by comparing the predictions of simple agent based models with survery data on income and wealth in Italy. Our results highlight the importance of network effects in shaping the wealth distribution and the dynamics of wealth accumulation. We show that persistent wealth inequality naturally stem from the hierarchical organization of the interactions among agents. Weakly connected agents can only exchange wealth with few other agents and are trapped at the lower end of the wealth distribution, relying only on income from labor. Well connected agents tend instead to accumulate wealth through increasing returns on their investments. Models like ours could be used to simulate policy interventions aimed at redressing excessive wealth inequality.