Wealth Inequality in Agent-Based Economies: The Dominant Role of Social Protection over Growth

TL;DR

This paper demonstrates that social protection policies are more effective than growth-driven redistribution in reducing wealth inequality within agent-based economic models, emphasizing the importance of targeted support for vulnerable populations.

Contribution

It introduces an agent-based Yard-Sale model incorporating social protection and redistribution, revealing the dominant role of social protection in inequality reduction.

Findings

Social protection significantly reduces wealth inequality.

Redistribution mainly reintegrates excluded agents.

Wealth distribution shape depends on individual risk heterogeneity.

Abstract

Persistent wealth inequality, where a small fraction of the population accumulates most resources while the majority remains economically vulnerable, is a widespread phenomenon. We investigate its underlying mechanisms using an agent-based Yard-Sale model that incorporates two complementary features: transaction rules that favor poorer agents, representing social protection policies, and an economic growth process with explicit wealth redistribution. Our results reveal that social protection plays a dominant role in reducing inequality, while redistribution primarily serves to reintegrate excluded agents. These findings suggest that social protection policies, that is, targeted mechanisms favoring economically vulnerable agents, may have a substantially greater impact on reducing inequality than redistribution driven solely by economic growth. We also find that both the shape of the wealth distributions and the resulting inequality levels are strongly influenced by the underlying distribution of individual risk, highlighting the importance of considering agent heterogeneity when modeling economic dynamics.