Wages and capital returns in a generalized Pólya urn

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.