IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/7853.html
   My bibliography  Save this paper

Investor Protection and Income Inequality: Risk Sharing vs Risk Taking

Author

Listed:
  • Bonfiglioli, Alessandra

Abstract

This paper studies the relationship between investor protection, entrepreneurial risk taking 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 firms to undertake risky projects. By increasing entrepreneurial risk taking, it raises income dispersion. By reducing the risk faced by entrepreneurs, it reduces income volatility. As a result, investor protection raises income inequality to the extent that it fosters risk taking, while it reduces it for a given level of risk taking. Empirical evidence from a panel of forty-five countries spanning the period 1976-2000 supports the predictions of the model.

Suggested Citation

  • Bonfiglioli, Alessandra, 2010. "Investor Protection and Income Inequality: Risk Sharing vs Risk Taking," CEPR Discussion Papers 7853, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7853
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP7853
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Ravallion, Martin & Chen, Shaohua, 1997. "What Can New Survey Data Tell Us about Recent Changes in Distribution and Poverty?," The World Bank Economic Review, World Bank, vol. 11(2), pages 357-382, May.
    2. Rafael La Porta & Florencio Lopez‐De‐Silanes & Andrei Shleifer, 2006. "What Works in Securities Laws?," Journal of Finance, American Finance Association, vol. 61(1), pages 1-32, February.
    3. David Thesmar & Mathias Thoenig, 2011. "Contrasting Trends in Firm Volatility," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(4), pages 143-180, October.
    4. Lacker, Jeffrey M & Weinberg, John A, 1989. "Optimal Contracts under Costly State Falsification," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1345-1363, December.
    5. Mike Burkart & Fausto Panunzi & Andrei Shleifer, 2003. "Family Firms," Journal of Finance, American Finance Association, vol. 58(5), pages 2167-2201, October.
    6. Dollar, David & Kraay, Aart, 2002. "Growth Is Good for the Poor," Journal of Economic Growth, Springer, vol. 7(3), pages 195-225, September.
    7. Michelacci, Claudio & Schivardi, Fabiano, 2008. "Does Idiosyncratic Business Risk Matter?," CEPR Discussion Papers 6910, C.E.P.R. Discussion Papers.
    8. Beck, Thorsten & Levine, Ross, 2004. "Stock markets, banks, and growth: Panel evidence," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 423-442, March.
    9. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
    10. Anthony B. Atkinson & Thomas Piketty & Emmanuel Saez, 2011. "Top Incomes in the Long Run of History," Journal of Economic Literature, American Economic Association, vol. 49(1), pages 3-71, March.
    11. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000. "Investor protection and corporate governance," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 3-27.
    12. Djankov, Simeon & McLiesh, Caralee & Shleifer, Andrei, 2007. "Private credit in 129 countries," Journal of Financial Economics, Elsevier, vol. 84(2), pages 299-329, May.
    13. Oi, Walter Y. & Idson, Todd L., 1999. "Firm size and wages," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 33, pages 2165-2214, Elsevier.
    14. Robert W. Fairlie & Alicia Robb, 2007. "Families, Human Capital, and Small Business: Evidence from the Characteristics of Business Owners Survey," ILR Review, Cornell University, ILR School, vol. 60(2), pages 225-245, January.
    15. Deininger, Klaus & Squire, Lyn, 1996. "A New Data Set Measuring Income Inequality," The World Bank Economic Review, World Bank, vol. 10(3), pages 565-591, September.
    16. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
    17. Shaohua Chien & Martin Ravallion, 2001. "How did the world's poorest fare in the 1990s?," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 47(3), pages 283-300, September.
    18. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934, Elsevier.
    19. Francesco Caselli & Nicola Gennaioli, 2008. "Economics and Politics of Alternative Institutional Reforms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(3), pages 1197-1250.
    20. Erik Hurst & Annamaria Lusardi, 2004. "Liquidity Constraints, Household Wealth, and Entrepreneurship," Journal of Political Economy, University of Chicago Press, vol. 112(2), pages 319-347, April.
    21. Barro, Robert J & Lee, Jong-Wha, 2001. "International Data on Educational Attainment: Updates and Implications," Oxford Economic Papers, Oxford University Press, vol. 53(3), pages 541-563, July.
    22. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-298, April.
    23. O. Ashenfelter & D. Card (ed.), 1999. "Handbook of Labor Economics," Handbook of Labor Economics, Elsevier, edition 1, volume 3, number 3.
    24. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
    25. Kihlstrom, Richard E & Laffont, Jean-Jacques, 1979. "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 719-748, August.
    26. Philippe Aghion & Peter Howitt & David Mayer-Foulkes, 2005. "The Effect of Financial Development on Convergence: Theory and Evidence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(1), pages 173-222.
    27. Mattias Lundberg & Lyn Squire, 2003. "The simultaneous evolution of growth and inequality," Economic Journal, Royal Economic Society, vol. 113(487), pages 326-344, April.
    28. Philippe Aghion & Patrick Bolton, 1997. "A Theory of Trickle-Down Growth and Development," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 64(2), pages 151-172.
    29. Marco Pagano & Paolo F. Volpin, 2005. "The Political Economy of Corporate Governance," American Economic Review, American Economic Association, vol. 95(4), pages 1005-1030, September.
    30. Acemoglu, Daron & Zilibotti, Fabrizio, 1999. "Information Accumulation in Development," Journal of Economic Growth, Springer, vol. 4(1), pages 5-38, March.
    31. Roland Bénabou, 1996. "Inequality and Growth," NBER Chapters, in: NBER Macroeconomics Annual 1996, Volume 11, pages 11-92, National Bureau of Economic Research, Inc.
    32. Francesco Caselli & Nicola Gennaioli, 2013. "Dynastic Management," Economic Inquiry, Western Economic Association International, vol. 51(1), pages 971-996, January.
    33. Alessandra Bonfiglioli, 2004. "Equities and Inequality," 2004 Meeting Papers 256, Society for Economic Dynamics.
    34. Oded Galor & Joseph Zeira, 1993. "Income Distribution and Macroeconomics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(1), pages 35-52.
    35. Thomas Piketty, 1997. "The Dynamics of the Wealth Distribution and the Interest Rate with Credit Rationing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 64(2), pages 173-189.
    36. Rafael La Porta & Florencio Lopez‐De‐Silanes & Andrei Shleifer, 1999. "Corporate Ownership Around the World," Journal of Finance, American Finance Association, vol. 54(2), pages 471-517, April.
    37. Antunes, António & Cavalcanti, Tiago & Villamil, Anne, 2008. "The effect of financial repression and enforcement on entrepreneurship and economic development," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 278-297, March.
    38. Martin Ravallion, 2003. "Measuring Aggregate Welfare in Developing Countries: How Well Do National Accounts and Surveys Agree?," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 645-652, August.
    39. Daron Acemoglu & Simon Johnson, 2005. "Unbundling Institutions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 949-995, October.
    40. Jonathan Heathcote & Fabrizio Perri & Giovanni L. Violante, 2010. "Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States: 1967-2006," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 15-51, January.
    41. Marco Pagano & Paolo Volpin, 2006. "Alfred Marshall Lecture Shareholder Protection, Stock Market Development, and Politics," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 315-341, 04-05.
    42. Vincenzo Quadrini, 2009. "Entrepreneurship in macroeconomics," Annals of Finance, Springer, vol. 5(3), pages 295-311, June.
    43. James R. Brown & Steven M. Fazzari & Bruce C. Petersen, 2009. "Financing Innovation and Growth: Cash Flow, External Equity, and the 1990s R&D Boom," Journal of Finance, American Finance Association, vol. 64(1), pages 151-185, February.
    44. Silvia Ardagna & Annamaria Lusardi, 2010. "Explaining International Differences in Entrepreneurship: The Role of Individual Characteristics and Regulatory Constraints," NBER Chapters, in: International Differences in Entrepreneurship, pages 17-62, National Bureau of Economic Research, Inc.
    45. Rajan, Raghuram G. & Zingales, Luigi, 2003. "The great reversals: the politics of financial development in the twentieth century," Journal of Financial Economics, Elsevier, vol. 69(1), pages 5-50, July.
    46. George R. G. Clarke & Lixin Colin Xu & Heng‐fu Zou, 2006. "Finance and Income Inequality: What Do the Data Tell Us?," Southern Economic Journal, John Wiley & Sons, vol. 72(3), pages 578-596, January.
    47. Rui Castro & Gian Luca Clementi & Glenn MacDonald, 2004. "Investor Protection, Optimal Incentives, and Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(3), pages 1131-1175.
    48. Thorsten Beck & Asli Demirgüç-Kunt & Ross Levine, 2007. "Finance, inequality and the poor," Journal of Economic Growth, Springer, vol. 12(1), pages 27-49, March.
    49. Schiller, Bradley R & Crewson, Philip E, 1997. "Entrepreneurial Origins: A Longitudinal Inquiry," Economic Inquiry, Western Economic Association International, vol. 35(3), pages 523-531, July.
    50. repec:bla:jfinan:v:58:y:2003:i:5:p:2167-2202 is not listed on IDEAS
    51. Enrico C. Perotti & Ernst-Ludwig von Thadden, 2006. "The Political Economy of Corporate Control and Labor Rents," Journal of Political Economy, University of Chicago Press, vol. 114(1), pages 145-174, February.
    52. Georg R. G. Clarke & Lixin Colin Xu & Heng-fu Zou, 2006. "Finance and Income Inequality: What Do the Data Tell Us?," Southern Economic Journal, John Wiley & Sons, vol. 72(3), pages 578-596, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Bruton, Garry & Sutter, Christopher & Lenz, Anna-Katharina, 2021. "Economic inequality – Is entrepreneurship the cause or the solution? A review and research agenda for emerging economies," Journal of Business Venturing, Elsevier, vol. 36(3).
    2. Alessandra Bonfiglioli & Rosario Crinò & Gino Gancia, 2019. "Trade, Finance, and Endogenous Firm Heterogeneity," Journal of the European Economic Association, European Economic Association, vol. 17(1), pages 79-130.
    3. Chi-Chuan Lee & Chien-Chiang Lee, 2018. "The Impact of Country Risk on Income Inequality: A Multilevel Analysis," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 136(1), pages 139-162, February.
    4. Mani Motameni, 2015. "Private Insurance and Income Inequality in Iran," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 5(3), pages 418-425, March.
    5. 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 of Labor Economics (IZA).
    6. Pavel Ševcík, 2012. "Financial Contracts and the Political Economy of Investor Protection," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(4), pages 163-197, October.
    7. Chen, Shen & Chen, Yuran & Zhang, Di & Wang, Jinmei, 2023. "Can minority investor activism promote corporate risk-taking? Evidence from a quasi-natural experiment in China," International Review of Financial Analysis, Elsevier, vol. 85(C).
    8. En‐Ze Wang & Chien‐Chiang Lee, 2023. "Foreign direct investment, income inequality and country risk," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(3), pages 2415-2435, July.
    9. Mani Motameni, 2017. "A Novel Analysis of Risk Sharing Effects on Income Inequality in Informal Insurances," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 21(2), pages 230-240, Spring.
    10. Nabi, Mahmoud Sami, 2015. "Equity-financing, income inequality and capital accumulation," Economic Modelling, Elsevier, vol. 46(C), pages 322-333.
    11. Claudio Michelacci & Fabiano Schivardi, 2013. "Does Idiosyncratic Business Risk Matter For Growth?," Journal of the European Economic Association, European Economic Association, vol. 11(2), pages 343-368, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alessandra Bonfiglioli, 2004. "Equities and Inequality," 2004 Meeting Papers 256, Society for Economic Dynamics.
    2. Beck Thorsten & Büyükkarabacak Berrak & Rioja Felix K. & Valev Neven T., 2012. "Who Gets the Credit? And Does It Matter? Household vs. Firm Lending Across Countries," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-46, March.
    3. Asli Demirgüç-Kunt & Ross Levine, 2009. "Finance and Inequality: Theory and Evidence," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 287-318, November.
    4. Kim, Dong-Hyeon & Lin, Shu-Chin, 2011. "Nonlinearity in the financial developmentâincome inequality nexus," Journal of Comparative Economics, Elsevier, vol. 39(3), pages 310-325, September.
    5. Manuel Oechslin, 2009. "Creditor protection and the dynamics of the distribution in oligarchic societies," Journal of Economic Growth, Springer, vol. 14(4), pages 313-344, December.
    6. Anjan K. Saha & Vinod Mishra & Russell Smyth, 2021. "Financial development and top income shares in OECD countries," Southern Economic Journal, John Wiley & Sons, vol. 87(3), pages 952-978, January.
    7. Mohamed Chakroun, 2020. "Threshold effects in the relationship between financial development and income inequality," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 25(3), pages 365-387, July.
    8. Seven, Unal & Coskun, Yener, 2016. "Does financial development reduce income inequality and poverty? Evidence from emerging countries," Emerging Markets Review, Elsevier, vol. 26(C), pages 34-63.
    9. Claessens, Stijn & Perotti, Enrico, 2007. "Finance and inequality: Channels and evidence," Journal of Comparative Economics, Elsevier, vol. 35(4), pages 748-773, December.
    10. Anna Lo Prete, 2018. "Inequality and the finance you know: does economic literacy matter?," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 35(1), pages 183-205, April.
    11. Ayyagari, Meghana & Beck, Thorsten & Hoseini, Mohammad, 2020. "Finance, law and poverty: Evidence from India," Journal of Corporate Finance, Elsevier, vol. 60(C).
    12. Brei, Michael & Ferri, Giovanni & Gambacorta, Leonardo, 2023. "Financial structure and income inequality," Journal of International Money and Finance, Elsevier, vol. 131(C).
    13. Steen Thomsen & Frederik Vinten, 2014. "Delistings and the costs of governance: a study of European stock exchanges 1996–2004," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 18(3), pages 793-833, August.
    14. James B. Ang, 2010. "Finance and Inequality: The Case of India," Southern Economic Journal, John Wiley & Sons, vol. 76(3), pages 738-761, January.
    15. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2004. "Finance, inequality, and poverty: cross-country evidence," Policy Research Working Paper Series 3338, The World Bank.
    16. Bourguignon, Francois, 2005. "The Effect of Economic Growth on Social Structures," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 27, pages 1701-1747, Elsevier.
    17. Thorsten Beck & Asli Demirguc‐Kunt & Luc Laeven & Ross Levine, 2008. "Finance, Firm Size, and Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(7), pages 1379-1405, October.
    18. Matsuoka, Tarishi & Naito, Katsuyuki & Nishida, Keigo, 2019. "The Politics Of Financial Development And Capital Accumulation," Macroeconomic Dynamics, Cambridge University Press, vol. 23(1), pages 358-383, January.
    19. Claessens, Stijn & Yurtoglu, B. Burcin, 2013. "Corporate governance in emerging markets: A survey," Emerging Markets Review, Elsevier, vol. 15(C), pages 1-33.
    20. Thorsten Beck & Asli Demirgüç-Kunt & Ross Levine, 2007. "Finance, inequality and the poor," Journal of Economic Growth, Springer, vol. 12(1), pages 27-49, March.

    More about this item

    Keywords

    Income inequality; Investor protection; Optimal financial contracts; Risk sharing; Risk taking;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:7853. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.