Wealth Dynamics in Communities

Daniel Barron, Yingni Guo and Bryony Reich

The Review of Economic Studies, 2023, vol. 90, issue 4, 1642-1668

Abstract: This article develops a model to explore how favour exchange influences wealth dynamics. We identify a key obstacle to wealth accumulation: wealth crowds out favour exchange. Therefore, households must choose between growing their wealth and accessing favour exchange. We show that low-wealth households rely on favour exchange at the cost of having tightly limited long-term wealth. As a result, initial wealth disparities persist and can even grow worse. We then explore how communities and policymakers can overcome this obstacle. Using simulations, we show that community benefits and place-based policies can stimulate both saving and favour exchange, and in some cases, can even transform favour exchange into a force that accelerates wealth accumulation.

Keywords: Favour exchange; Wealth dynamics; Under-investment; Inequality; C73; D15; D31; O17 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:90:y:2023:i:4:p:1642-1668.

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