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

Zhi Feng Huang*, Sorin Solomon

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

28 Scopus citations

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.

Original languageEnglish
Pages (from-to)503-513
Number of pages11
JournalPhysica A: Statistical Mechanics and its Applications
Volume294
Issue number3-4
DOIs
StatePublished - 15 May 2001

Keywords

  • Cut-off
  • Finite-size effect
  • Multiplicative process
  • Power law

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