Investor Protection, Risk Sharing and Inequality

Alessandra Bonfiglioli ()

UFAE and IAE Working Papers from Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC)

Abstract: This paper studies the relationship between investor protection, financial risk sharing and income inequality. In the presence of market frictions, better protection makes investors more willing to take on entrepreneurial risk while lending to firms. This implies lower cost of external finance and better risk sharing between financiers and entrepreneurs. Investor protection, by boosting the market for risk sharing plays the twofold role of encouraging agents to undertake risky enterprises and providing them with insurance. By increasing the number of risky projects, it raises income inequality. By extending insurance to more agents, it reduces it. As a result, the relationship between the size of the market for risk sharing and income inequality is hump-shaped. Empirical evidence from a cross-section of sixty-eight countries, and a panel of fifty countries over the period 1976-2000, supports the predictions of the model.

Keywords: Income inequality; stock market development; financial development; capital market frictions; investor protection (search for similar items in EconPapers)
JEL-codes: D31 E44 G30 O15 O16 (search for similar items in EconPapers)
Pages: 48
Date: 2007-01-29, Revised 2011-07-15
New Economics Papers: this item is included in nep-cfn, nep-ent, nep-ias and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:aub:autbar:679.07

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