Growth and Redistribution: The Hedging Perspective

We investigate the impact of wealth redistribution on economic growth, building on Kelly’s (1956) optimal investment portfolio theory. A growth-optimal policy redistributes wealth from “lucky” overperforming individuals to underperforming ones, minimizing the systematic component of this redistribution in a myopic fashion. That is, the optimal policy minimizes the discrepancy between endowments and outcomes, counterfactually taking outcomes as independent of endowments. The myopia in this result follows from a decoupling argument that allows us to model the planner as independently choosing a growth-maximizing policy and a pattern of wealth circulation. (JEL D31, E23, G41, G51, H23, O41)