Does a severe regulatory policy on trade benefit the economy?

Abstract

The appropriate amount of regulation to reconcile social stability and economic prosperity is a subject of intense study and debate. In practice, the degree of regulatory enforcement is at least as important as the regulation itself. In this work, we present a simulation model of society as a network of interacting agents subject to regulation of their economic activities, with varying degrees of enforcement. Each agent’s compliance with regulation is modeled as a string of bits, which also governs the probability of connection with other agents. Each agent has an initial share of the total wealth that changes over the course of transactions. At each simulation step, the poorest agent takes action to achieve a wealth change at the expense of its first neighbors in the network. Non-conformity to regulation is punished with a probability parameter representing the strength of regulatory enforcement. Our results suggest that regulation has the benefit of reducing wealth inequality but also the disadvantage of increasing job instability, which could lead to lower wealth production in the real world. Our analysis indicates a possible method for choosing an optimal level of regulatory enforcement.