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I have an interesting hypothesis: firm inefficiency leads to greater income inequality. Think about it. Generally, smaller, newer firms are more efficient than

I have an interesting hypothesis: firm inefficiency leads to greater income inequality. Think about it. Generally, smaller, newer firms are more efficient than older, larger firms. Greater firm inefficiency means that more older firms will be replaced by newer firms (whether by market position or outright bankruptcy). Average consumers can only invest in older, established firms, and, indeed, many 401k's are tied-up in stocks of 50+ year old companies. Millionaires, however, by being certified investors, can invest in many startups, a small portion of which will eventually become large, established firms in the future. This causes the rich to gain money, and others to loose it. Let me give a (contrived) example. Let's say you wanted to invest in a car company in 2005. If you were an average investor, you may have put your money in (old) GM, whose stock is now worthless. If you were a billionaire, you could have split your money between Tesla, ZAP, and Project Better Place. ZAP and PBP are now defunct, but you would have made a boatload of money off of Tesla.

dnr 12y ago
How does that square with the observation that venture capital returns aren't actually that good? http://pando.com/2013/07/30/ouch-ten-year-venture-returns-still-lag-the-broader-markets/ http://pando.com/2013/07/30/ouch-ten-year-venture-returns-st... http://avc.com/2013/02/venture-capital-returns/ http://avc.com/2013/02/venture-capital-returns/ What percentage of certified investors actually do invest in startups, instead of just index funds or fancy managed funds that invest in established companies?
mseebach 12y ago
That's good point, but if that's the effect, the cause isn't inefficient firms, it's the regulation that forbids "regular people" from investing in startups. https://en.wikipedia.org/wiki/Accredited_investor https://en.wikipedia.org/wiki/Accredited_investor Realistically, though, some of your 401k fund is likely invested in startups, it's just highly diversified because it's very high risk, and you don't want to gamble with your pension pot.
eru 12y ago
Income equality has been around for longer than the whole certified investor business (or even the US).
VintageCool 12y ago
According to this article in the Economist, large firms are more efficient. "Big firms are generally more productive, offer higher wages and pay more taxes than small ones. Economies dominated by small firms are often sluggish." "A recent study of American businesses found that the link between company size and jobs growth disappears once the age of firms is controlled for." http://www.economist.com/node/21548945 http://www.economist.com/node/21548945
- Toenex 12y ago
  That reads more like an opinion piece than a researched article. Not that the OP is different.

dnr 12y ago

How does that square with the observation that venture capital returns aren't actually that good? http://pando.com/2013/07/30/ouch-ten-year-venture-returns-still-lag-the-broader-markets/ http://pando.com/2013/07/30/ouch-ten-year-venture-returns-st... http://avc.com/2013/02/venture-capital-returns/ http://avc.com/2013/02/venture-capital-returns/ What percentage of certified investors actually do invest in startups, instead of just index funds or fancy managed funds that invest in established companies?

mseebach 12y ago

That's good point, but if that's the effect, the cause isn't inefficient firms, it's the regulation that forbids "regular people" from investing in startups. https://en.wikipedia.org/wiki/Accredited_investor https://en.wikipedia.org/wiki/Accredited_investor Realistically, though, some of your 401k fund is likely invested in startups, it's just highly diversified because it's very high risk, and you don't want to gamble with your pension pot.

eru 12y ago

Income equality has been around for longer than the whole certified investor business (or even the US).

VintageCool 12y ago

According to this article in the Economist, large firms are more efficient. "Big firms are generally more productive, offer higher wages and pay more taxes than small ones. Economies dominated by small firms are often sluggish." "A recent study of American businesses found that the link between company size and jobs growth disappears once the age of firms is controlled for." http://www.economist.com/node/21548945 http://www.economist.com/node/21548945

Toenex 12y ago
That reads more like an opinion piece than a researched article. Not that the OP is different.