Homophilic Effects on Economic Inequality: A Dynamic Network Agent-Based Model

Abstract: Wealth transactions are central to economic activity, and their particularities shape macroeconomic outcomes. We propose an agent-based model to investigate how homophily influences economic inequality. The model simulates wealth exchanges in a dynamic network composed of two groups, $A$ and $B$, differentiated by a homophily parameter $\delta$, which increases intragroup connections within $A$. Economic interactions alternate between conservative wealth exchanges and connection rewiring, both influenced by agents' wealth and $\delta$. We examine economic and network dynamics under varying levels of social protection $f$, which favor poorer agents in transactions. At low $f$, results reveal high inequality and link concentration, with $\delta$ impacting only transient dynamics. At high $f$, homophily becomes an economic advantage, as increasing $\delta$ directs wealth flow to group $A$. However, since this flow benefits the wealthiest agents, it simultaneously exacerbates internal inequality within the group. These findings show that homophily is a significant driver of inequality, directing wealth towards the homophilous group and worsening internal disparities.