Wages and capital returns in a generalized Pólya urn

Thomas Gottfried () and Stefan Grosskinsky ()
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Thomas Gottfried: University of Augsburg
Stefan Grosskinsky: University of Augsburg

Journal of Economic Interaction and Coordination, 2025, vol. 20, issue 2, No 6, 477-518

Abstract: Abstract It is a widely observed phenomenon that wealth is distributed significantly more unequally than wages. In this paper we study this phenomenon using a new extension of Pólya’s urn, modelling wealth growth through wages and capital returns. We focus in particular on the role of increasing return rates on capital, which have been identified as a main driver of inequality, and labor share, the second main parameter of our model. We fit the parameters from real-world data in Germany, so that simulation results reproduce the empirical wealth distribution and recent dynamics in Germany quite accurately, and are essentially independent from initial conditions. Our model is simple enough to allow for a detailed mathematical analysis and provides interesting predictions for future developments and on the importance of wages and capital returns for wealth aggregation. We also provide an extensive discussion of the robustness of our results and the plausibility of the main assumptions used in our model, and identify possible policy implications.

Keywords: Markov processes; Growth models; Reinforced processes; Wealth dynamics; Pólya urn (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11403-024-00437-9

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