Introducing Equilibrium Concepts into a Contested Field
Chapter 4: Income distribution and the capital market
In ‘Income distribution and the capital market’, we replicate a long-standing insight: economic growth in conjunction with stable prices tends to reduce the distributional conflict between savers and investors. We also show how the Target2 mechanism made it possible to shift purchasing power in the Eurozone during the years 2008–12 from the GANL (Germany, Austria, Netherlands, Luxembourg) countries to the so-called GIIPS (Greece, Italy, Ireland, Portugal, Spain) countries, financed by a money-printing process and substituting regular capital flows. In a comprehensive static welfare evaluation of Target2, we find overall net welfare gains for the GIIPS countries. In contrast, the GLNF countries (Germany, Luxembourg, Netherlands, Finland) suffer from net welfare losses due to the Target2 mechanism. The analysis of bargaining in the credit market reveals that mutual cooperation is not a Nash equilibrium. Therefore, only banking supervision is capable of enforcing fair contracts in the credit market. In the political economy section of the chapter, we go beyond the irrelevance theorem of Modigliani-Miller: firms quoted at the stock exchange have to face the alternatives of payout policies vis-à-vis retention policies. There are good reasons to assume that small (large) shareholders have a preference for payout over retention policies: stabilizing dividend payments to become a foreseeable stream of income helps the small stockholders to smooth their consumption expenditures. Our own empirical analysis for Germany (1991–2010) supports the view that stock market quoted firms tend to plan payouts so that retentions – given the pitfalls of the business cycle – are to a large extent a mere residual.
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