Equity Markets, Transactions Costs, and Capital Accumulation: An Illustration

Poorly developed equity markets inhibit the transfer of capital ownership. Moreover, the costs of transacting in equity markets affect not just the level of investment, but the kinds of investments that are undertaken. Once equity markets allow the ownership of capital to be transferred economically...

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Bibliographic Details
Published in:The World Bank economic review 1996-05, Vol.10 (2), p.241-265
Main Authors: Bencivenga, Valerie R., Smith, Bruce D., Starr, Ross M.
Format: Article
Language:English
Subjects:
Capital investments
Capital stocks
Fees
Financial investments
Financial transactions
Internal rate of return
Investment return rates
Steady state economies
Stock markets
Transaction costs
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Summary:Poorly developed equity markets inhibit the transfer of capital ownership. Moreover, the costs of transacting in equity markets affect not just the level of investment, but the kinds of investments that are undertaken. Once equity markets allow the ownership of capital to be transferred economically, reductions in costs tend to favor the use of longer-maturity investments. When there is a relationship between the maturity of an investment and its productivity, transactions cost reductions are conducive to observing certain kinds of increases in productive efficiency. This article analyzes savings, investment, and consumption decisions by using an overlapping generations model with two-period-lived agents. The analysis allows for several technologies for converting current output into future capital that vary by productivity and maturity, and it makes ownership of capital costly to transfer. A reduction in transactions costs will typically alter the composition of savings and investment, and have potentially complicated consequences for capital accumulation and steady-state output.
ISSN:0258-6770
1564-698X
DOI:10.1093/wber/10.2.241