Inequality reversal: effects of the savings propensity and correlated returns

TL;DR

This paper explores how inequality in income and wealth can initially rise and then fall during economic development, using a generalized kinetic exchange model that demonstrates the Kuznets Curve phenomenon.

Contribution

It introduces a generalized kinetic exchange model that captures the dynamic reversal of inequality, providing a theoretical framework for the Kuznets Curve.

Findings

Model shows inequality reversal under specific conditions

Reproduces the Kuznets Curve pattern

Highlights role of savings propensity and correlated returns

Abstract

In the last decade, a large body of literature has been developed to explain the universal features of inequality in terms of income and wealth. By now, it is established that the distributions of income and wealth in various economies show a number of statistical regularities. There are several models to explain such static features of inequality in an unifying framework and the kinetic exchange models, in particular, provide one such framework. Here we focus on the dynamic features of inequality. In the process of development and growth, inequality in an economy in terms of income and wealth follows a particular pattern of rising in the initial stage followed by an eventual fall. This inverted U-shaped curve is known as the Kuznets Curve. We examine the possibilities of such behavior of an economy in the context of a generalized kinetic exchange model. It is shown that under some specific conditions, our model economy indeed shows inequality reversal.