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.
|Number of pages||44|
|Publication status||Published - 2013|
|Event||2013 Annual Meeting of the Society for Economic Dynamics - Yonsei University, Seoul, Korea, Republic of|
Duration: 27 Jun 2013 → 29 Jun 2013
|Conference||2013 Annual Meeting of the Society for Economic Dynamics|
|Country||Korea, Republic of|
|Period||27/06/2013 → 29/06/2013|