I've always found the village and town prosperity to be a bit of a black spot in M&B, would be nice to finally get some good info on how it works and how to improve it. *Hint* *Hint* to any devs who decide to read this
It's not that complex, but you don't get to see the numbers.
Farmer parties leaving and returning to the village increase prosperity.
Economic quests (cattle, grain etc) increase prosperity once completed.
Buying stuff from the village as the player increases prosperity
Building certain buildings such as the windmill in your village increases it's prosperity.
Bandit attacks/infestations decrease prosperity.
Looting resets prosperity to 0
In addition there's a flux value. I'm not sure if it's random, or based on some factor like the prosperity of their town (i.e. if the town it's trading with is at high prosperity, the prosperity increases from farmer groups are higher).
Caravans arriving increase prosperity
Farmers arriving increase prosperity
Economic quests for the town increase prosperity
Note in both cases, a farmer/caravan which leaves town and does not arrive at the destination reduces prosperity. So if you've got bandits camped on the doorstep prosperity will rapidly plummet every time a farmer party leaves and is attacked.
Range band seems to be higher for towns too, generally it takes a lot more caravans and farmers to increase a town's prosperity than it does for a village.