Limiting risk to reduce inequality: insights from the Yard-Sale model

TL;DR

This paper explores how limiting risk in the Yard-Sale wealth exchange model can reduce inequality, showing that risk restrictions lead to more equitable wealth distributions and less extreme disparities.

Contribution

It introduces a risk-limiting mechanism into the Yard-Sale model, demonstrating its effectiveness in promoting economic balance and reducing inequality.

Findings

Risk restrictions lead to more equitable wealth distributions

Extreme wealth disparities are significantly reduced

Systemic outcomes are influenced by individual risk constraints

Abstract

Wealth inequality remains a critical socioeconomic challenge, driven by systemic dynamics and self-reinforcing mechanisms that amplify the economic imbalances. Simplified models from statistical physics provide valuable insights into the fundamental mechanisms governing wealth distribution. In this study, we extend the Yard-Sale model -- a minimal kinetic exchange framework -- to investigate how limiting risk in economic transactions affects inequality. While previous research demonstrates that such models naturally lead to wealth concentration, we introduce a mechanism that restricts the maximum risk agents can assume during exchanges. Numerical simulations reveal that this modification fosters more equitable wealth distributions and significantly reduces extreme disparities. These findings highlight the importance of individual-level constraints in shaping systemic outcomes, offering new perspectives on promoting economic balance.