Homophilic Effects on Economic Inequality: A Dynamic Network Agent-Based Model

TL;DR

This paper presents an agent-based model demonstrating how homophily influences wealth distribution and inequality within dynamic social networks, revealing that homophily can both concentrate wealth and increase internal disparities.

Contribution

It introduces a novel agent-based network model that explores the dual role of homophily in shaping economic inequality and network structure.

Findings

High social protection reduces inequality and link concentration.

Homophily directs wealth flow to the homophilous group at high social protection levels.

Homophily exacerbates internal inequality within the favored group.

Abstract

Wealth transactions are central to economic activity, and their particularities shape macroeconomic outcomes. We propose an agent-based model to investigate how homophily influences economic inequality. The model simulates wealth exchanges in a dynamic network composed of two groups, $A$ and $B$, differentiated by a homophily parameter $\delta$, which increases intragroup connections within $A$. Economic interactions alternate between conservative wealth exchanges and connection rewiring, both influenced by agents' wealth and $\delta$. We examine economic and network dynamics under varying levels of social protection $f$, which favor poorer agents in transactions. At low $f$, results reveal high inequality and link concentration, with $\delta$ impacting only transient dynamics. At high $f$, homophily becomes an economic advantage, as increasing $\delta$ directs wealth flow to group $A$. However, since this flow benefits the wealthiest agents, it simultaneously exacerbates internal inequality within the group. These findings show that homophily is a significant driver of inequality, directing wealth towards the homophilous group and worsening internal disparities.