Financial accumulation implies ever-increasing wealth inequality

TL;DR

This paper presents a mathematical model demonstrating that financial accumulation processes inherently lead to increasing wealth inequality over time, regardless of market efficiency.

Contribution

It introduces a minimalist model combining financial markets, wealth accumulation, and compound interest to mathematically prove the inevitability of rising wealth inequality.

Findings

Financial investment returns cause increasing wealth concentration.

Wealth inequality grows over time through the accumulation process.

The effect persists even in efficient markets.

Abstract

Wealth inequality is an important matter for economic theory and policy. Ongoing debates have been discussing recent rise in wealth inequality in connection with recent development of active financial markets around the world. Existing literature on wealth distribution connects the origins of wealth inequality with 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 through time. This cumulative effect through space and time depends on the financial accumulation process and holds also under efficient financial markets, which generate some fair investment game that individual investors do repeatedly play through time.