Sand in the Wheels of Capitalism, On the Political Economy of Capital Market Frictions

Ernst-Ludwig von Thadden, Enrico Perotti and Mario Bersem
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Mario Bersem: Copenhagen Business School

No 1187, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: We present a positive theory of capital market frictions that raise the cost of capital for new firms and lower the cost of capital for incumbent firms. Capital market frictions arise from a political conflict across voters who differ in two dimensions: (i) a fraction of voters owns capital, the rest receives only lab or income; and (ii) voters have different vintages of human capital. We identify young workers as the decisive voter group, with preferences in between capitalists who favor a free capital market, and old workers, who favor restricted capital mobility. We show that capital market frictions do not naturally arise in a static framework, or even in a dynamic framework if capital market frictions are reversible. But if capital market frictions can be made to p ersist over time, we show that young workers favor capital market frictions as a way to smo oth income, especially if wealth is concentrated and if technological obsolescence is high.

Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:1187

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