Financial accumulation implies ever-increasing wealth inequality
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Financial accumulation implies ever-increasing wealth inequality Yuri Biondi1
· Stefano Olla2
Received: 29 May 2019 / Accepted: 6 February 2020 © Springer-Verlag GmbH Germany, part of Springer Nature 2020
Abstract Wealth inequality is an important matter for economic theory and policy. The recent rise in wealth inequality has been discussed in connection with the recent development of active global financial markets. The existing literature on wealth distribution links wealth inequality to a variety of drivers. Our approach develops a minimalist modelling strategy that combines three featuring mechanisms: active financial markets, individual wealth accumulation and compound interest structure. We provide mathematical proof that accumulated financial investment returns involve ever-increasing wealth concentration and inequality across individual investors most of the time. This cumulative effect over space and time depends on financial accumulation processes, including under efficient financial markets, which generate a fair investment game that individual investors repeatedly play through time. Keywords Inequality · Economic process · Compound return · Simple return · Minimal institution JEL Classification C46 · D31 · D63 · E02 · E21
1 Introduction Wealth inequality is an important matter for economic theory and policy. The recent rise in wealth inequality has been discussed in connection with the recent development of active global financial markets (Beck et al. 2007; Piketty 2013; Krugman 2013; Stiglitz 2012; Solow 2014). While some have argued for the role of financial
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Yuri Biondi [email protected] Stefano Olla [email protected]
1
CNRS, IRISSO, UMR 7170, Université Paris-Dauphine, PSL, 75775 Paris-Cedex 16, France
2
CEREMADE, UMR CNRS 7534, Université Paris-Dauphine, PSL, 75775 Paris-Cedex 16, France
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Y. Biondi, S. Olla
development in reducing income inequality and benefiting the poorer, others criticise the increasing concentration of financial capital and related income as the main driver of rising inequality. Moreover, issues of wealth distribution were raised by the 99% movement in the USA following the Global Financial Crisis of 2007–2008. They have claimed that increased financialisation of the economy and society in recent decades has involved growing appropriation of wealth by the richest 1% of the population to the detriment of the remaining 99%, implying a more unequal and unfair wealth distribution. The existing literature on wealth distribution links wealth inequality to a variety of drivers (Bertola et al. 2006; Snowdon and Vane 2005). Already at the beginning of the twentieth century, pointing to wealth concentration in the economy and society, economist and sociologist V. Pareto suggested the so-called Pareto wealth distribution as an empirical regularity (Pareto 1897), while economic statistician C. Gini developed ingenious statistical techniques to represent wealth inequality through the so-called Gini Index (Gini 1912). In this context, a stream of the relevant li
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