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The Spirit of Capitalism and Stock-Market Prices

  • Gurdip S. Bakshi

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

  • Zhiwu Chen

    (Fisher College of Business, Ohio State University)

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
Date of revision:
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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  1. 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 971-87, December.
  2. 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 519-43, June.
  3. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151.
  4. Wayne E. Ferson & George M. Constantinides, 1991. "Habit Persistence and Durability in Aggregate Consumption: Empirical Tests," NBER Working Papers 3631, National Bureau of Economic Research, Inc.
  5. Robson, Arthur J, 1992. "Status, the Distribution of Wealth, Private and Social Attitudes to Risk," Econometrica, Econometric Society, vol. 60(4), pages 837-57, July.
  6. 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.
  7. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  8. Lars Peter Hansen & John Heaton & Erzo Luttmer, 1993. "Econometric Evaluation of Asset Pricing Models," NBER Technical Working Papers 0145, National Bureau of Economic Research, Inc.
  9. 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 225-62, April.
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