Capital Redistribution and the Market Allocation of Firm-Ownership

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Capital Redistribution and the Market Allocation of Firm-Ownership

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Grüner, Hans Peter
Schils, Ruediger

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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3130.

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Date of creation: Jan 2002
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Handle: RePEc:cpr:ceprdp:3130

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Find related papers by JEL classification:
D24 - Microeconomics - - Production and Organizations - - - Production; Capital and Total Factor Productivity; Capacity
D30 - Microeconomics - - Distribution - - - General
D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior
P12 - Economic Systems - - Capitalist Systems - - - Capitalist Enterprises
P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

This paper has been announced in the following NEP Reports:

NEP-ALL-2003-03-14 (All new papers)

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Grüner, Hans Peter, 2003. "Inequality and Political Consensus," CEPR Discussion Papers 4159, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)

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