DP3130 Capital Redistribution and the Market Allocation of Firm-Ownership

Author(s): Hans Peter GrĂ¼ner, Ruediger Schils
Publication Date: January 2002
Keyword(s): firm-ownership, inequality, moral hazard, redistibutive taxation
JEL(s): D24, D30, D72, P12, P16
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3130

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.