The point of departure of this paper isthat in the absence of effectively functioning asset marketsthe distribution of wealth matters for efficiency.Inefficient asset markets depress total factor productivity(TFP) in two ways: first, by not allowing efficient firms togrow to the size that they should achieve (this couldinclude many great firms that are never started); andsecond, by allowing inefficient firms to survive bydepressing the demand for factors (good firms are too small)and hence factor prices. Both of these effects are dampenedwhen the wealth of the economy is in the hands of the mostproductive people, again, for two reasons: first, becausethey do not rely as much on asset markets to get outsideresources into the firm; and second, because wealth allowsthem to self insure and therefore they are more willing totake the right amount of risk. None of this, however, tellsus that efficiency enhancing redistributions must always betargeted to the poorest. There is some reason to believethat a lot of the inefficiency lies in the fact that manymedium size firms are too small.
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