Capital Markets, Information Aggregation and Inequality: Theory and Experimental Evidence

Abstract:     
In most industrialized economies, financial wealth is distributed far more unequally than income. According to Wolff (2007) more than half of the American households possess almost no productive capital while realizing about 20 percent of national income. This mismatch poses a problem for the efficient aggregation of consumer needs on capital markets. Individuals use information about their own preferences as consumers to identify profitable investments. Under certain conditions, this behaviour efficiently matches future demand with productive capacity, thus replacing future markets for consumer goods. However, when wealth is distributed too unequally, capacity cannot match consumer needs. I present some first experimental evidence in favour of consumption driven investment behaviour based on real portfolio choices and self-reported preferences about consumer goods.

Number of Pages in PDF File: 24

Keywords: capital markets, Consumption driven investment, information aggregation, wealth distribution

JEL Classification: C91, G11, G14, O16

working papers series