Title: Private Capital Markets and Inequality
This paper studies the relationship between the growth in private capital markets and the rise in economic inequalities in the U.S over the last two decades. First, we document that the share of financing raised by early-stage companies from U.S.-based high-net-worth individuals (HNWIs) tripled from 2004 to 2022. Second, exploiting state-level variation in exposure to the expanded federal capital gains tax exemption on qualified small business stock (QSBS), we find that HNWIs’ growing participation in private capital markets increased the income gap between HNWIs and other income earners by 6.0%. Third, we show that this rise in income concentration appears to have been driven by HNWIs’ excess returns on their early-stage investments relative to public stock market returns. Finally, using counterfactual simulations, we find that HNWIs’ excess returns on these investments accounted for 11% and 5% of the growth in the top 1% share of income and wealth, respectively, from 2010 to 2019.
Presenter: Vrinda Mittal (UNC)
Coauthors: Ararat Gocmen and Clara Martinez-Toledano
Discussant: Simon Oh (Columbia)