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Finance and the Preservation of Wealth

  • Nicola Gennaioli
  • Andrei Shleifer
  • Robert W. Vishny

We introduce the model of asset management developed in Gennaioli, Shleifer, and Vishny (2012) into a Solow-style neoclassical growth model with diminishing returns to capital. Savers rely on trusted intermediaries to manage their wealth (claims on capital stock), who can charge fees above costs to trusting investors. In this model, the size of the financial sector rises with aggregate wealth, and wealth grows relative to GDP. As a consequence, the ratio of financial income to GDP rises over time, even though fees for given financial services decline. Because the size of the financial sector fluctuates with changes in investor trust, the model can account for the sharp decline of finance in the Great Depression, as well as its slow recovery afterwards. Entry by financial intermediaries as wealth increased in recent years may have further deepened investor trust and encouraged growth of financial income.

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File URL: http://www.nber.org/papers/w19117.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19117.

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Date of creation: Jun 2013
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Publication status: published as Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2014. "Finance and the Preservation of Wealth," The Quarterly Journal of Economics, Oxford University Press, vol. 129(3), pages 1221-1254.
Handle: RePEc:nbr:nberwo:19117
Note: AP CF EFG
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  1. Luigi Guiso, 2010. "A Trust-driven Financial Crisis.Implications for the Future of Financial Markets," EIEF Working Papers Series 1006, Einaudi Institute for Economics and Finance (EIEF), revised Mar 2010.
  2. Thomas Philippon, 2015. "Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation," American Economic Review, American Economic Association, vol. 105(4), pages 1408-38, April.
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  8. Thomas Piketty & Gabriel Zucman, 2014. "Capital is Back: Wealth-Income Ratios in Rich Countries 1700–2010," The Quarterly Journal of Economics, Oxford University Press, vol. 129(3), pages 1255-1310.
  9. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2005. "Trusting the Stock Market," NBER Working Papers 11648, National Bureau of Economic Research, Inc.
  10. Ulrike Malmendier & Stefan Nagel, 2009. "Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking?," NBER Working Papers 14813, National Bureau of Economic Research, Inc.
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