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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27350
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| Title: | Ownership Structure, Income Distribution, and Competitive Equilibrium:
A Theory of Business Cycles, Human Capital, and Asset Returns |
| Authors: | Dai, Qiang |
| Issue Date: | 16-Aug-2000 |
| Series/Report no.: | S-MF-00-02 |
| Abstract: | In this paper, I present a theory of dynamic economic growth, business
cycles, and asset pricing that integrates (1) Marx's idea (and
emphasized by Klein) of a two-class heterogeneity of the ownership
structure of physical capital and human capital in a capitalist society,
(2) Keynes' idea of sticky wages, and (3) the existence of a competitive
equilibrium with intertemporal consumption and portfolio decisions by
risk-averse capitalists facing a contractual labor cost. The aggregate
labor income as a function of recent history of aggregate outputs is
determined by the prevailing mode of income distribution. I focus on a
modern capitalist economy in which the income distribution is not
dictated by the capitalists (as in the formative years of capitalism
which was the subject of inquiry by Adam Smith, David Ricardo, and Karl
Max), but rather is determined by the economic and political consensus
reached between the capitalists and workers through a legal and
political framework featuring strong labor unions, anti-trust laws, and
progressive tax codes. Three main implications for the macro-economy
are presented. First, my theory endogenizes completely the
three-equation Klein model of consumption function, savings function,
and the wage demand function. Second, I show that cyclic behavior is
driven entirely by the assumed form of income distribution. Production
and labor income shocks do not drive, but help sustain the cyclic
behavior by preventing the economy from converging to the steady state
mean. Third, I show that the Marxian doctrine that the "rate of
surplus value" remains constant and the "organic composition
of capital" keeps rising is inconsistent with the predictions of my
model, and the difference is traced to the different assumptions on
income distribution, and leads to different conclusions on the stability
of capitalist economies. By assuming that capital markets clear in
equilibrium, I determine the risk premium for both production and labor
income risks, and consequently asset returns and the value of human
capital - all endogenously. A special case of the model is
observationally equivalent to the stochastic habit formation model of
Dai (2000), and thus inherits its ability to simultaneously explain the
equity premium puzzle, riskless rate puzzle, and the expectations
puzzle. In general, the labor market need not clear, due to the only
friction in the model: the longevity of the labor contract. From Equity
Premium Puzzle to Expectations Puzzle: A General Equilibrium Production
Economy with Stochastic Habit Formation |
| URI: | http://hdl.handle.net/2451/27350 |
| Appears in Collections: | Macro Finance
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