Working Paper: CEPR ID: DP14746
Authors: Giacomo Corneo
Abstract: A government with a good financial reputation could use its borrowing power to build a sovereign wealth fund that mainly invests in the world stock market. In expectation, it would gain the equity risk premium multiplied by the size of the fund. That gain could be earmarked to a social dividend, which would reduce income inequality. This paper develops a simple model in which the creation of such a fund generates a Pareto improvement. Then, it derives a formula for its socially optimal size and proposes an institutional framework for its management. Finally, it compares this policy with one of promoting popular capitalism.
Keywords: Income Inequality; Public Ownership; Popular Capitalism
JEL Codes: H1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Establishment of a progressive sovereign wealth fund (SWF) (G23) | Pareto improvement in expected utilities for both workers and savers (D11) |
| SWF increases expected lifetime utility of workers (J29) | SWF does not reduce utility of savers (G59) |
| SWF helps to address the participation puzzle in household finance (G59) | many households do not invest in risky assets (D14) |
| Creation of the SWF requires capital taxation (H29) | preserves the Pareto improvement (D61) |
| SWF reduces initial inefficiency in asset allocation (G11) | moves level of risk-taking closer to optimal (G40) |