Finance and the Preservation of Wealth

Nicola Gennaioli, Andrei Shleifer and R. Vishny

Scholarly Articles from Harvard University Department of Economics

Abstract: We introduce the model of asset management developed in Gennaioli, Shleifer, and Vishny (2012) into a Solow-style neoclassical growth model with diminishing returns to capital. Savers rely on trusted intermediaries to manage their wealth (claims on capital stock), who can charge fees above costs to trusting investors. In this model, the size of the financial sector rises with aggregate wealth, and wealth grows relative to GDP. As a consequence, the ratio of financial income to GDP rises over time, even though fees for given financial services decline. Because the size of the financial sector fluctuates with changes in investor trust, the model can account for the sharp decline of finance in the Great Depression, as well as its slow recovery afterwards. Entry by financial intermediaries as wealth increased in recent years may have further deepened investor trust and encouraged growth of financial income.

Date: 2014
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Citations: View citations in EconPapers (29)

Published in The Quarterly Journal of Economics

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http://dash.harvard.edu/bitstream/handle/1/27814562/w19117.pdf (application/pdf)

Related works:
Journal Article: Finance and the Preservation of Wealth (2014)
Working Paper: Finance and the Preservation of Wealth (2014)
Working Paper: Finance and the Preservation of Wealth (2013)
Working Paper: Finance and the Preservation of Wealth
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Persistent link: https://EconPapers.repec.org/RePEc:hrv:faseco:27814562

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