Too Big for their Boots

Abstract

This paper studies wealth accumulation in communities. We develop a model of favor exchange among households in a community and their investment decisions. Our result identifies a key obstacle to wealth accumulation: wealth crowds out favor exchange. Thus, households under-invest, since growing their wealth would entail losing the support of the community. The result is a persistent wealth gap between such communities and the rest of the economy. Using numerical simulations, we show that increased productivity outside the community exacerbates under-investment inside the community, while strengthening kinship, friendship, or religious ties within the community encourages wealth accumulation.