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

  • Grüner, Hans Peter
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    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.

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    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6750.

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    Date of creation: Mar 2008
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    Handle: RePEc:cpr:ceprdp:6750
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    1. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 35-52, January.
    2. Peter Funk, 1994. "Satiation and Underdevelopment," Discussion Paper Serie A 508, University of Bonn, Germany.
    3. Gruner, Hans Peter, 2003. "Redistribution as a selection device," Journal of Economic Theory, Elsevier, vol. 108(2), pages 194-216, February.
    4. James B. Davies & Anthony Shorrocks & Edward N. Wolff, 2010. "The World Distribution of Household Wealth," Working Papers id:3217, eSocialSciences.
    5. Abhijit V. Banerjee & Andrew F. Newman, 1990. "Occupational Choice and the Process of Development," Discussion Papers 911, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    6. Thomas Piketty & Emmanuel Saez, 2003. "Income Inequality In The United States, 1913-1998," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 1-39, February.
    7. HansPeter Grüner & Rüdiger Schils, 2007. "The political Economy of Wealth and Interest," Economic Journal, Royal Economic Society, vol. 117(523), pages 1403-1422, October.
    8. Funk,Peter, 1993. "The direction of technological change," Discussion Paper Serie A 393, University of Bonn, Germany.
    9. Piketty, Thomas, 1997. "The Dynamics of the Wealth Distribution and the Interest Rate with Credit Rationing," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 173-89, April.
    10. Peter Funk, 1995. "Endogenous Growth, Temporary Equilibrium, and the Direction of Change," Discussion Paper Serie A 506, University of Bonn, Germany.
    11. Joshua D. Coval & Tobias J. Moskowitz, 1999. "Home Bias at Home: Local Equity Preference in Domestic Portfolios," Journal of Finance, American Finance Association, vol. 54(6), pages 2045-2073, December.
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