The Political Economy of Capital Reallocation

Abstract

In this paper we develop a positive theory of capital market frictions. We focus on a political conflict that arises between citizens with different vintages of human capital. Once human capital is sunk in a firm- or sector specific technology, stakeholders will resist the emergence of newer sectors to avoid inter-sectoral reallocation of capital and thus a reduction in their (quasi) rents. We argue that in democracies, a majority will choose to protect stakeholder interests and restrict capital mobility if (i) wealth is concentrated; (ii) technology growth is high; and (iii) social mobility is low