DP14746 Progressive Sovereign Wealth Funds
A government with a good financial reputation could use its borrowing power to build a sovereign wealth fund that mainly invests in the world stock market. In expectation, it would gain the equity risk premium multiplied by the size of the fund. That gain could be earmarked to a social dividend, which would reduce income inequality. This paper develops a simple model in which the creation of such a fund generates a Pareto improvement. Then, it derives a formula for its socially optimal size and proposes an institutional framework for its management. Finally, it compares this policy with one of promoting popular capitalism.