Finite market size as a source of extreme wealth inequality and market instability

Details Finite market size as a source of extreme wealth inequality and market instability Finite market size as a source of extreme wealth inequality and market instability

2001-03-07

arxiv.org/abs/cond-mat/0103170v1

Physica A 294, 503-513 (2001)

Physics

Condensed Matter

Statistical Mechanics

13 pages, 6 figures, Physica A, in press

Scientific paper

10.1016/S0378-4371(01)00113-3

We study the finite-size effects in some scaling systems, and show that the finite number of agents N leads to a cut-off in the upper value of the Pareto law for the relative individual wealth. The exponent $\alpha$ of the Pareto law obtained in stochastic multiplicative market models is crucially affected by the fact that N is always finite in real systems. We show that any finite value of N leads to properties which can differ crucially from the naive theoretical results obtained by assuming an infinite N. In particular, finite N may cause in the absence of an appropriate social policy extreme wealth inequality $\alpha < 1$ and market instability.

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