Wealth Dynamics in Communities

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.