Investment Efficiency and the Distribution of Wealth

Abstract

The point of departure of this paper is
 that in the absence of effectively functioning asset markets
 the distribution of wealth matters for efficiency.
 Inefficient asset markets depress total factor productivity
 (TFP) in two ways: first, by not allowing efficient firms to
 grow to the size that they should achieve (this could
 include many great firms that are never started); and
 second, by allowing inefficient firms to survive by
 depressing the demand for factors (good firms are too small)
 and hence factor prices. Both of these effects are dampened
 when the wealth of the economy is in the hands of the most
 productive people, again, for two reasons: first, because
 they do not rely as much on asset markets to get outside
 resources into the firm; and second, because wealth allows
 them to self insure and therefore they are more willing to
 take the right amount of risk. None of this, however, tells
 us that efficiency enhancing redistributions must always be
 targeted to the poorest. There is some reason to believe
 that a lot of the inefficiency lies in the fact that many
 medium size firms are too small.