The New Economics of Income Distribution
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The New Economics of Income Distribution

Introducing Equilibrium Concepts into a Contested Field

Friedrich L. Sell

With the increased interest in the role of inequality in modern economies, this timely and original book explores income distribution as an equilibrium phenomenon. Though globalization tends to destroy earlier equilibria within industrialized and developing countries, new equilibria are bound to emerge. The book aims at a better understanding of the forces that create these new equilibria in income distribution and examines the concept at three distinct levels: market equilibrium, bargaining equilibrium and political economy equilibrium. In particular, the author addresses the question of how the main factor markets of labour and capital are related to income distribution.
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Chapter 4: Income distribution and the capital market

Friedrich L. Sell


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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