Owning Up: Closely Held Firms and Wealth Inequality

Résumé

This paper studies how frictions in debt and equity markets affect wealth inequality in Eurozone countries. Using micro data on households and firms, I document that in more unequal countries, there are more privately held firms and ownership of publicly traded firms is more concentrated. I develop a dynamic general equilibrium model in which entrepreneurs have the option to run a private firm and issue debt, or go public and also issue outside equity. Both forms of external finance are subject to country-specific frictions. With more access to debt, entrepreneurs can run larger firms and are wealthier. Similar to debt, outside equity allows entrepreneurs to increase investment in their firm, but it also reduces their risk exposure, which lowers savings and wealth holdings. When parameters are chosen to match the facts I document on firm ownership and financing, the model successfully predicts differences in wealth concentration across countries.