Citation

Discussion Paper Details

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Title: Redistribution as a Selection Device

Author(s): Hans Peter Gr�ner

Publication Date: August 2000

Keyword(s): Education, Firm-Ownership, General Equilibrium With Moral Hazard and Adverse Selection and Selection Of Entrepreneurs

Programme Area(s): Public Economics

Abstract: This paper studies the role of the wealth distribution for the market selection of entrepreneurs when agents differ in talent. It argues that the redistribution of initial endowments can increase an economy's surplus because more talented individuals get credit for their risky investment projects. Moreover, the redistribution of initial endowments may lead to a Pareto-improvement although all agents are non-satiable. In my model an agent's entrepreneurial ability is his private information. Moral hazard in production creates rents for entrepreneurs if they are believed to be both talented and willing to provide entrepreneurial effort. I find conditions such that unproductive rich entrepreneurs crowd out productive poor ones on the capital market. Then redistribution of initial endowments leads to the selection of better entrepreneurs, increases the economy's surplus, and - in some cases - makes all agents better off.

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Bibliographic Reference

Gr�ner, H. 2000. 'Redistribution as a Selection Device'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2534