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Sand in the Wheels of Capitalism, On the Political Economy of Capital Market Frictions

Author

Listed:
  • Ernst-Ludwig von Thadden

    (Universität Mannheim)

  • Enrico Perotti

    (U Amsterdam and CEPR)

  • Mario Bersem

    (Copenhagen Business School)

Abstract

We present a positive theory of capital market frictions that raise the cost of capital for new firms and lower the cost of capital for incumbent firms. Capital market frictions arise from a political conflict across voters who differ in two dimensions: (i) a fraction of voters owns capital, the rest receives only lab or income; and (ii) voters have different vintages of human capital. We identify young workers as the decisive voter group, with preferences in between capitalists who favor a free capital market, and old workers, who favor restricted capital mobility. We show that capital market frictions do not naturally arise in a static framework, or even in a dynamic framework if capital market frictions are reversible. But if capital market frictions can be made to p ersist over time, we show that young workers favor capital market frictions as a way to smo oth income, especially if wealth is concentrated and if technological obsolescence is high.

Suggested Citation

  • Ernst-Ludwig von Thadden & Enrico Perotti & Mario Bersem, 2013. "Sand in the Wheels of Capitalism, On the Political Economy of Capital Market Frictions," 2013 Meeting Papers 1187, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:1187
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    References listed on IDEAS

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