SFB 303 Discussion Paper No. A - 545

Author: Grüner, Hans-Peter, and Rüdiger Schils
Title: Capital Redistribution and the Market Allocation of Firm-Ownership
Abstract: This paper studies the relationship between political redistribution and the allocation of firm-ownership when production requires an unobservable input. The economy's wealth distribution affects the equilibrium interest rate and the allocation of entrepreneurial rents because wealth serves as a bonding device and determines agents ability and willingness to borrow. In a two-class society in which the poor make up the majority of voters full redistribution always takes place. We derive conditions for a three-class society such that decisive middle class voters oppose redistribution. The aggregate capital endowment determines whether the middle class can own less or must own more than average wealth in order to oppose redistribution. Moreover, the size of the capital stock determines whether middle class voters support non-redistribution or whether they use redistribution as a mean to get access to entrepreneurial rents.
Keywords: Capital Redistribution, Firm-Ownership, Moral Hazard
JEL-Classification-Number: D24, D30, D72, P12, P16
Creation-Date: December 1996
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