TY - JOUR
AU - Hauner, Thomas
PY - 2021/12/13
Y2 - 2024/02/29
TI - Wealth Inequality, Network Topology and Financial Instability
JF - Journal of Income Distribution®
JA - JID
VL - 28
IS - 3-4
SE - Articles
DO - 10.25071/1874-6322.40445
UR - https://jid.journals.yorku.ca/index.php/jid/article/view/40445
SP -
AB - <p>This paper asks if two, otherwise identical, economies were distinguished only by their distributions of wealth, are they equally stable in response to a random shock? A theoretical financial network model is proposed to understand the relationship between wealth inequality and financial crises. In a financial network, financial assets link individual asset and liability holders to form a web of economic connections. The total connectivity of an individual is described by their degree, and the overall distribution of connections in the network is imposed through a degree distribution--equivalent to the wealth distribution as incoming connections represent assets and outgoing connections liabilities. A network's topology varies with the level of wealth inequality and total wealth and together, simulations show, they determine network contagion in the event of a random negative income shock to some individual. Random network simulations, whereby each financial connection is randomly placed, reveal that increasing wealth inequality makes a wealthy network less stable--as measured by the share of individuals failing financially or the decline in financial asset values. These results suggest a unique architectural role for accumulated assets and their distribution in macro-financial stability.</p>
ER -