Capital Redistribution and the Market Allocation of Firm-Ownership

This Paper studies the relationship between political wealth redistribution and the allocation of firm-ownership when production requires an unobservable input. The economy's wealth distribution affects the equilibrium interest rate and the allocation of entrepreneurial rents because wealth serves as a bonding device and determines agents’ ability and willingness to borrow. This leads to unconventional voting behaviour of the politically decisive middle class: the political preferences of middle and upper class voters coincide when redistribution only has an adverse interest-rate effect. Middle class voters vote with the lower class instead if redistribution enables them to get access to entrepreneurial rents. Technological change may in-duce dramatic changes in political outcomes and greater inequality pronounces the interest-rate effect and may lead to less redistribution.