We introduce a model of the banking sector that formally incorporates a buffer function of capital. Heterogeneous banks choose their portfolio risk, bank size, and capital holdings. Banks voluntarily hold equity when the buffer effect against the risk of default outweighs the cost advantages of...

We offer a new explanation for why taxes have become less redistributive in many countries in parallel with an increase in income concentration. When performance-based contracts are needed to incentivize effort, redistribution through progressive income taxes becomes less precisely targeted....