Discussion Paper Details

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Title: Capital Redistribution and the Market Allocation of Firm-Ownership

Author(s): Hans Peter Grüner and Ruediger Schils

Publication Date: January 2002

Keyword(s): firm-ownership, inequality, moral hazard and redistibutive taxation

Programme Area(s): Public Economics

Abstract: This Paper studies the relationship between political wealth redistribution and the allocation of firm-ownership when production requires an unobservable input. The economy's wealth distribution affects the equilibrium interest rate and the allocation of entrepreneurial rents because wealth serves as a bonding device and determines agents? ability and willingness to borrow. This leads to unconventional voting behaviour of the politically decisive middle class: the political preferences of middle and upper class voters coincide when redistribution only has an adverse interest-rate effect. Middle class voters vote with the lower class instead if redistribution enables them to get access to entrepreneurial rents. Technological change may in-duce dramatic changes in political outcomes and greater inequality pronounces the interest-rate effect and may lead to less redistribution.

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Bibliographic Reference

Grüner, H and Schils, R. 2002. 'Capital Redistribution and the Market Allocation of Firm-Ownership'. London, Centre for Economic Policy Research.