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The Spirit of Capitalism and Stock-Market Prices

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Listed author(s):
  • Gurdip S. Bakshi

    (Department of Economics and Finance, University of New Orleans
    University of Maryland)

  • Zhiwu Chen

    (Fisher College of Business, Ohio State University)

Abstract

In existing theory, wealth is no more valuable than its implied consumption rewards. In reality investors acquire wealth not just for its implied consumption, but for the resulting social status. Max M. Weber refers to this desire for wealth as the spirit of capitalism. We examine, both analytically and empirically, implications of Weber's hypothesis for consumption, savings, and stock prices. When investors care about relative social status, propensity to consume and risktaking behavior wvildl epend on social standards, and stock prices will be volatile. The spirit of capitalism seems to be a driving force behind stock-market volatility and economic growth.

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Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 511.

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Length: 26 pages
Date of creation: 1996
Publication status: Published in The American Economic Review, Vol. 86, No. 1 (Mar., 1996), pp. 133-157
Handle: RePEc:cuf:wpaper:511
Contact details of provider: Web page: http://cema.cufe.edu.cn/

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Find related papers by JEL classification:
  • G1 - Financial Economics - - General Financial Markets
  • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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  1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  2. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-987, December.
  3. Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 225-262, April.
  4. Robson, Arthur J, 1992. "Status, the Distribution of Wealth, Private and Social Attitudes to Risk," Econometrica, Econometric Society, vol. 60(4), pages 837-857, July.
  5. Ferson, Wayne E. & Constantinides, George M., 1991. "Habit persistence and durability in aggregate consumption: Empirical tests," Journal of Financial Economics, Elsevier, vol. 29(2), pages 199-240, October.
  6. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151-151.
  7. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-543, June.
  8. Heng-fu Zou, 1993. "The Capitalist Spirit and a Resolution of the Savings Puzzle," CEMA Working Papers 478, China Economics and Management Academy, Central University of Finance and Economics.
  9. Hansen, Lars Peter & Heaton, John & Luttmer, Erzo G J, 1995. "Econometric Evaluation of Asset Pricing Models," Review of Financial Studies, Society for Financial Studies, vol. 8(2), pages 237-274.
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