DP6750 Capital Markets, Information Aggregation and Inequality: Theory and Experimental Evidence

Author(s): Hans Peter GrĂ¼ner
Publication Date: March 2008
Keyword(s): capital markets, Consumption driven investment, information aggregation, wealth distribution
JEL(s): C91, G11, G14, O16
Programme Areas: Public Economics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6750

In most industrialized economies, financial wealth is distributed far more unequally than income. According to Wolff (2007) more than half of the American households possess almost no productive capital while realizing about 20 percent of national income. This mismatch poses a problem for the efficient aggregation of consumer needs on capital markets. Individuals use information about their own preferences as consumers to identify profitable investments. Under certain conditions, this behaviour efficiently matches future demand with productive capacity, thus replacing future markets for consumer goods. However, when wealth is distributed too unequally, capacity cannot match consumer needs. I present some first experimental evidence in favour of consumption driven investment behaviour based on real portfolio choices and self-reported preferences about consumer goods.