Research Details

Abstract

This paper develops a model to explore how favor exchange influences wealth dynamics. We identify a key obstacle to wealth accumulation: wealth crowds out favor exchange. Therefore, households must choose between growing their wealth and accessing favor exchange. We show that low-wealth households rely on favor 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 favor exchange, and in some cases, can even transform favor exchange into a force that accelerates wealth accumulation.

Type

Article

Author(s)

Daniel Barron, yingni guo, Bryony Reich

Date Published

2023

Citations

Barron, Daniel, yingni guo, and Bryony Reich. 2023. Wealth Dynamics in Communities. Review of Economic Studies.(4): 1642-1668.