Working Paper: CEPR ID: DP3130
Authors: Hans Peter Grüner; Rüdiger Schils
Abstract: This Paper studies the relationship between political wealth 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. This leads to unconventional voting behaviour of the politically decisive middle class: the political preferences of middle and upper class voters coincide when redistribution only has an adverse interest-rate effect. Middle class voters vote with the lower class instead if redistribution enables them to get access to entrepreneurial rents. Technological change may in-duce dramatic changes in political outcomes and greater inequality pronounces the interest-rate effect and may lead to less redistribution.
Keywords: firm ownership; inequality; moral hazard; redistributive taxation
JEL Codes: D24; D30; D72; P12; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Wealth distribution (D31) | Equilibrium interest rate (E43) |
| Equilibrium interest rate (E43) | Allocation of entrepreneurial rents (D33) |
| Wealth distribution (D31) | Allocation of entrepreneurial rents (D33) |
| Wealth distribution (D31) | Borrowing capabilities of agents (F34) |
| Borrowing capabilities of agents (F34) | Allocation of entrepreneurial rents (D33) |
| Redistribution adversely affects interest rates (E43) | Middle-class voters align with lower-class voters (D72) |
| Redistribution provides access to entrepreneurial rents (D39) | Middle-class voters align with upper-class voters (D72) |
| Technological changes (O33) | Increased inequality (F61) |
| Increased inequality (F61) | Interest rate effect (E43) |
| Interest rate effect (E43) | Redistribution (H23) |