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Redistribution as a Selection Device

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  • Grüner, Hans Peter

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.

Suggested Citation

  • Grüner, Hans Peter, 2000. "Redistribution as a Selection Device," CEPR Discussion Papers 2534, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:2534
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    More about this item

    Keywords

    Education; Firm-Ownership; General Equilibrium With Moral Hazard and Adverse Selection; Selection Of Entrepreneurs;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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