Investment Efficiency and the Distribution of Wealth

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 all...

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Bibliographic Details
Main Author:	Banerjee, Abhijit V.
Format:	Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2017
Subjects:	ACCESS TO CREDIT AGENCY PROBLEM AGRICULTURE ALLOCATION AMOUNT OF RISK ASSET MARKETS ASSETS AVERAGE PRODUCTIVITY BANKING SYSTEM BANKS BID BOND BORROWER BORROWING BUSINESS OWNERS CAPACITY UTILIZATION CAPITAL MARKET CAPITAL MARKETS CAPITAL STOCK COLLATERAL COMPLEMENTARY INPUTS CONSUMPTION SMOOTHING CONTRACT ENFORCEMENT COST OF CAPITAL CREDIT CONSTRAINT CREDIT CONSTRAINTS CREDIT LIMIT CREDIT MARKET CREDIT MARKETS DEFAULT COSTS DEFAULT RATE DEFAULT RATES DEPOSIT DEPOSITORS DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT BANK DEVELOPMENT ECONOMICS DIMINISHING RETURNS DIMINISHING RETURNS TO SCALE DISTRIBUTION OF WEALTH DIVERSIFICATION DUAL ECONOMY DURABLE EARNINGS ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMIC RESEARCH ECONOMIC THEORY ECONOMICS STUDIES EDUCATIONAL BENEFITS EMPOWERMENT ENTREPRENEUR ENTREPRENEURS EXPECTED RETURNS EXPENDITURE EXPENDITURES EXPLICIT CREDIT EXPROPRIATION EXTERNALITIES FACTORS OF PRODUCTION FAMILIES FARMER FARMERS FINANCIAL ASSET FINANCIAL ASSETS FINANCIAL INTERMEDIARIES FINANCIAL MARKETS FINANCIAL SYSTEMS FISCAL POLICIES FIXED COST FIXED COSTS FORM OF CREDIT GDP GOVERNMENT INTERVENTION GREEN REVOLUTION GROUPS OF PEOPLE GROWTH RATE GROWTH THEORY HIGH INTEREST RATES HOLDING HOUSEHOLD WEALTH HOUSEHOLDS HUMAN CAPITAL INCENTIVE COSTS INCOME INCOME DISTRIBUTION INCOME INEQUALITY INCREASING RETURNS INEFFICIENCY INEQUALITY INFORMAL CREDIT INFORMAL FINANCE INFORMAL INSURANCE INFORMAL LENDERS INFORMATIONAL ASYMMETRIES INSURANCE MARKET INSURANCE MARKETS INTEREST COSTS INTEREST RATE INTEREST RATES INTERNATIONAL BANK INTERNATIONAL DEVELOPMENT INVENTORIES INVESTING INVESTMENT DECISION INVESTMENT DECISIONS INVESTMENT NEEDS INVESTMENT OPPORTUNITIES INVESTMENT OPPORTUNITY INVESTMENT RETURNS LABOR MARKET LACK OF ACCESS LAND MARKET LAND OWNERSHIP LAND REFORM LAND REFORMS LAND RIGHTS LAND TITLING LANDHOLDERS LEGAL OBLIGATION LEGAL TITLE LENDER LENDERS LIQUID WEALTH LIVING STANDARDS LOAN LOAN SIZE LOCAL FINANCE LONG TERM INVESTMENT MACROECONOMIC POLICY MACROECONOMICS MARGINAL PRODUCT MARGINAL PRODUCTS MARKET CONSTRAINTS MARKET ECONOMIES MARKET RETURN MERITOCRACY MICROCREDIT MICROENTERPRISES MIDDLE INCOME COUNTRIES MONEYLENDERS MORAL HAZARD MORTGAGE NATURAL RESOURCES NET WORTH NEW BUSINESS NUTRITION OPPORTUNITY COST OUTPUT PER CAPITA PAWN PAWN SHOPS POLITICAL ECONOMY POTENTIAL INVESTORS PRIME LENDING RATE PRIVATE INVESTMENT PRIVATE RETURNS PRODUCTION EFFICIENCY PRODUCTION FUNCTION PRODUCTIVE ASSETS PRODUCTIVE INVESTMENT PROFITABILITY PUBLIC FINANCE RATE OF RETURNS RATES OF RETURN RATES OF RETURNS REAL ESTATE REAL EXCHANGE RATES REAL INTEREST REAL INTEREST RATES RECESSIONS REPAYMENT RESIDUAL CLAIMANT RISK AVERSION RISK SHARING RURAL CREDIT RURAL CREDIT MARKET SAVINGS SELF EMPLOYMENT SHAREHOLDERS SHORT TERM INVESTMENTS SLR SMALL BUSINESS SMALL BUSINESSES SMALL ENTERPRISES SMALL FARM SOCIAL NORMS SOCIAL RELATIONS STATEMENT STOCK MARKET STOCKS TAX TAX COLLECTION TELECOMMUNICATIONS TELECOMMUNICATIONS EQUIPMENT TOTAL FACTOR PRODUCTIVITY TRADE CREDIT TRANSACTION TRANSACTION COSTS UNDERVALUATION VALUE ADDED VILLAGE VILLAGES WORKING CAPITAL
Online Access:	http://documents.worldbank.org/curated/en/652441468161947001/Investment-efficiency-and-the-distribution-of-wealth http://hdl.handle.net/10986/27940

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Summary:	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.

Investment Efficiency and the Distribution of Wealth

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