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

Poorly developed equity markets inhibit the transfer of capitalownership. Moreover, the costs of transacting in equity marketsaffect not just the level of investment, but the kinds of investmentsthat are undertaken. Once equity markets allow the ownershipof capital to be transferred economically, reductions in coststend to favor the use of longer-maturity investments. When thereis a relationship between the maturity of an investment andits productivity, transactions cost reductions are conduciveto observing certain kinds of increases in productive efficiency.This article analyzes savings, investment, and consumption decisionsby using an overlapping generations model with two-period-livedagents. The analysis allows for several technologies for convertingcurrent output into future capital that vary by productivityand maturity, and it makes ownership of capital costly to transfer.A reduction in transactions costs will typically alter the compositionof savings and investment, and have potentially complicatedconsequences for capital accumulation and steady-state output.