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Investor protection and income inequality: Risk sharing vs risk taking

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  • Bonfiglioli, Alessandra

Abstract

This paper studies the relationship between investor protection and income inequality. In the presence of market frictions, better protection makes investors more willing to take on entrepreneurial risk when lending to firms, thereby improving the degree of risk sharing between financiers and entrepreneurs. On the other hand, by increasing risk sharing, investor protection also induces more risk taking. By increasing entrepreneurial risk taking, it raises income dispersion. By reducing the risk faced by entrepreneurs, it reduces income volatility. As a result, the relationship between investor protection and income inequality is non monotonic, since the risk-taking effect dominates at low levels of investor protection, while risk sharing becomes stronger when more risk is taken. Empirical evidence from up to sixty-seven countries spanning the period 1976–2004 supports the predictions of the model.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 99 (2012)
Issue (Month): 1 ()
Pages: 92-104

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Handle: RePEc:eee:deveco:v:99:y:2012:i:1:p:92-104

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Web page: http://www.elsevier.com/locate/devec

Related research

Keywords: Investor protection; Income inequality; Optimal financial contracts; Risk taking; Risk sharing;

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Cited by:
  1. Pavel Ševcík, 2012. "Financial Contracts and the Political Economy of Investor Protection," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(4), pages 163-97, October.
  2. Heshmati, Almas & Kim, Jungsuk, 2014. "A Survey of the Role of Fiscal Policy in Addressing Income Inequality, Poverty Reduction and Inclusive Growth," IZA Discussion Papers 8119, Institute for the Study of Labor (IZA).

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