An agent-based model of wealth inequality with overlapping generations, local interactions, and intergenerational transfers

Abstract

In order to shed light on the patterns of economic development characterized by sustained growth and persistent wealth inequality, we develop an agent-based model in which generations overlap and parents leave bequests to offspring. The model shows how neighborhoodeffects influence the long-run trajectory of human capital investments and wealth distribution. The analyses proceed in three steps. First, we implement the agent-based version of an overlapping generations model, enabling validation of ourbaseline simulations. Second, we introduce direct, local interactions to demonstratehow human capital investments and inequality respond to neighborhood effects. As far as we know, our study is among the first to explore the impact of local interactions on wealth inequality in an agent-based model with intergenerational transfers.Finally, we show howlocal interactions can influencethe efficacy of policies that aim to generate an equitable distribution of wealth.The main results indicate that human capital is highest when local interactions are moderate, that is, neither too weak nor too strong. At the optimal level, either higher- or lower-intensity interactions would reduce aggregate human capital and therefore output. The distributional impact exhibits a similar pattern albeit with very different ramifications. Specifically, the moderate interactions that maximize output also generate the most unequal distribution of wealth. An exogenous shock leading to a more cohesive community lowers output but produces a more equitable distribution. By contrast, weak interactions precipitate a mild output contraction and, at the same time, significantly lower wealth inequality. The agent-based simulations thus suggest diametrically opposed responses of output and equity to changes in the intensity of local interactions. The agent-based model developed for this study offers the potential to improve our understanding of the complex interplay between human capital, intergenerational transfers, and neighborhood effects.