Working Paper: NBER ID: w28261
Authors: Roger Farmer; Jean-Philippe Bouchaud
Abstract: We construct a model of an exchange economy in which agents trade assets contingent on an observable signal, the probability of which depends on public opinion. The agents in our model are replaced occasionally and each person updates beliefs in response to observed outcomes. We show that the distribution of the observed signal is described by a quasi-non-ergodic process and that people continue to disagree with each other forever. These disagreements generate large wealth inequalities that arise from the multiplicative nature of wealth dynamics which make successful bold bets highly profitable.
Keywords: Wealth Inequality; Quasi-Nonergodicity; Self-Fulfilling Prophecies
JEL Codes: E00; G00; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| disagreements among agents (D74) | significant wealth inequalities (D31) |
| public opinion (D72) | agents' beliefs about the public signal (D83) |
| agents' beliefs about the public signal (D83) | wealth inequality (D31) |
| wealth dynamics (D31) | disparities in wealth distribution (D31) |
| wealth influences belief formation (G41) | market outcomes (P42) |
| wealth accumulation processes (P12) | extreme inequalities (D63) |