DP15745 Financial Globalization vs. Income Inequality: The Surprising Role of Delegated Portfolio Flows in Taming the Top 1%

Author(s): Si Cheng, Massimo Massa, Hong Zhang
Publication Date: February 2021
Keyword(s): Delegated portfolio management, financial globalization, Income inequality, Mutual funds
JEL(s): D31, D63, G15, G23
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15745

We document a surprising finding that foreign capital inflows delegated through global mutual funds reduce the income of the top 1%. To rationalize this observation, we utilize a comprehensive database of worldwide ownership of both private and public firms for 2001-2013, which allows us to trace income inequality to its micro-foundations of sales revenue accrued to rich families. We find that large delegated foreign inflows induce local rich families to sell concentrated yet profitable assets, consistent with a diversification channel for financial globalization to influence income inequality. Alternative mechanisms fail to explain these findings. Our results have important normative implications