A Fokker-Planck model for wealth inequality dynamics

School of Physics and Astronomy, Tel-Aviv University - Tel-Aviv, Israel

Received: 15 March 2017
Accepted: 16 June 2017

Abstract

Studying the mechanisms that govern the dynamics of the wealth distribution is essential for understanding the recent trend of growing wealth inequality. A particularly important explanation is Piketty's argument, giving credit to the seminal events of the first half of the 20th century for the relatively egalitarian second half of this century. Piketty suggested that these dramatic events were merely a perturbation imposed on the economy affecting the wealth structure, while in general, wealth inequality tends to increase regularly. We present a simple stochastic model for wealth and income based on coupled geometric Brownian motions and derive a Fokker-Planck equation from which the joint wealth-income distribution and its moments can be extracted. We then analyze the dynamics of these moments and hence of the inequality. Our analysis largely supports Piketty's argument regarding the irregularity of the 20th century, that wealth inequality inevitably tends to increase. We find, however, that even if wealth inequality will eventually go up, under plausible conditions, it can go down for periods of up to several decades.