Working Paper: CEPR ID: DP2534
Authors: Hans Peter Grüner
Abstract: This paper studies the role of the wealth distribution for the market selection of entrepreneurs when agents differ in talent. It argues that the redistribution of initial endowments can increase an economy's surplus because more talented individuals get credit for their risky investment projects. Moreover, the redistribution of initial endowments may lead to a Pareto-improvement although all agents are non-satiable. In my model an agent's entrepreneurial ability is his private information. Moral hazard in production creates rents for entrepreneurs if they are believed to be both talented and willing to provide entrepreneurial effort. I find conditions such that unproductive rich entrepreneurs crowd out productive poor ones on the capital market. Then redistribution of initial endowments leads to the selection of better entrepreneurs, increases the economy's surplus, and - in some cases - makes all agents better off.
Keywords: education; firm ownership; general equilibrium with moral hazard and adverse selection; selection of entrepreneurs
JEL Codes: D31; H23; H32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| initial wealth distribution (D39) | ability of entrepreneurs to secure funding (M13) |
| ability of entrepreneurs to secure funding (M13) | overall productivity of the economy (E23) |
| initial wealth distribution (D39) | overall productivity of the economy (E23) |
| wealth redistribution (H23) | Pareto improvement (D61) |
| wealth redistribution (H23) | economic efficiency (D61) |
| wealth redistribution (H23) | average ability of entrepreneurs (L26) |
| average ability of entrepreneurs (L26) | returns on investments (G11) |
| moral hazard (G52) | inefficiencies in the capital market (G14) |