We propose one route to a more inclusive society. Our context is the prevailing one of high wealth inequality where stockholders alone supply the stochastic discount factor governing the allocation of capital. A large and pervasive pecuniary externality is thus imposed on non-stockholder workers, something we view as antithetical to the notion of an inclusive society. Accordingly, the paper explores the extent to which the externality can be purely privately internalized solely (without wealth redistribution) through a combination of bond trading between workers and stockholders and egalitarian present value wage bargaining in the labor market. In this incomplete financial market setting, endogenous countercyclical Coasian worker property rights arise as a natural consequence of egalitarian bargaining. This shifting distribution of property rights manifests itself in the form of wage payments representable as endogenous low-risk present value wage assets characterized by efficient wage markups, allowing roughly 60% of the pecuniary externality to be internalized in the benchmark case. As wealth inequality grows, increasing firm desire to retain bonds for precautionary purposes leads to massive declines in default free interest rates with worker income insurance increasingly provided by the wage asset whose value becomes progressively disassociated from labor productivity. Under extreme inequality, this feedback loop, what we refer to as the “polarization trap,” restricts the stakeholder economy to internalize only 50% of the externality. Macroeconomically, the economy gravitates towards cyclical stagnation rather than secular stagnation. For all degrees of wealth inequality, however, the long-run decentralized equilibrium is constrained efficient (exclusive equity ownership is retained), because this stakeholder economy’s increasing centralization of capital ownership serves as the engine of economic growth.
* For insightful conversations and comments, the authors wish to thank Jean-Pierre Danthine, Glenn Hubbard, Chris Moser, Jennifer La’O, Nachum Sicherman, Paolo Siconolfi, Pierre Yared, participants in the Macro Lunch Seminar series at Columbia Business School and, especially, Joe Stiglitz. The usual disclaimer applies.