Finite market size as a source of extreme wealth inequality and market instability

We study the finite-size effects in some scaling systems, and show that the finite number of agents N leads to a cut-off in the upper value of the Pareto law for the relative individual wealth. The exponent alpha of the Pareto law obtained in stochastic multiplicative market models is crucially affected by the fact that N is always finite in real systems. We show that any finite value of N leads to properties which can differ crucially from the naive theoretical results obtained by assuming an infinite N. In particular, finite N may cause in the absence of an appropriate social policy extreme wealth inequality alpha < 1 and market instability. (C) 2001 Elsevier Science B.V. All rights reserved.