EQUITY MARKETS, TRANSACTIONS COSTS, AND CAPITAL ACCUMULATION - AN ILLUSTRATION

Poorly developed equity markets inhibit the transfer of capital owners hip. Moreover, the costs of transacting in equity markets affect not j ust the level of investment, but the kinds of investments that are und ertaken. Once equity markets allow the ownership of capital to be tran sferred economically, reductions in costs tend to favor the use of lon ger-maturity investments. When there is a relationship between the mat urity of an investment and its productivity, transactions cost reducti ons are conducive to observing certain kinds of increases in productiv e efficiency. This article analyzes savings, investment, and consumpti on decisions by using an overlapping generations model with two-period -lived agents. The analysis allows for several technologies for conver ting current output into future capital that vary by productivity and maturity, and it makes ownership of capital costly to transfer. A redu ction in transactions costs will typically alter the composition of sa vings and investment, and have potentially complicated consequences fo r capital accumulation and steady-state output.