Investor protection and income inequality: Risk sharing vs risk taking

Alessandra Bonfiglioli ()

Journal of Development Economics, 2012, vol. 99, issue 1, 92-104

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.

Keywords: Investor protection; Income inequality; Optimal financial contracts; Risk taking; Risk sharing (search for similar items in EconPapers)
JEL-codes: D31 E44 O16 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (11)

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Related works:
Working Paper: Investor Protection and Income Inequality: Risk Sharing vs Risk Taking (2015)
Working Paper: Investor Protection and Income Inequality: Risk Sharing vs Risk Taking (2010)
Working Paper: Investor Protection and Income Inequality: Risk Sharing vs Risk Taking (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:99:y:2012:i:1:p:92-104

DOI: 10.1016/j.jdeveco.2011.09.007

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