DP8391 Inequality, Tax Avoidance, and Financial Instability

Author(s): Augustin Landier, Guillaume Plantin
Publication Date: May 2011
Keyword(s): financial instability, tax avoidance
JEL(s): G01, H26
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8391

We model the link between inequality and excessive risk taking. In the presence of increasing returns to tax avoidance, the middle class is willing to take non rewarded financial risk despite risk aversion. Electoral pressure may lead an incumbent politician to endorse this excessive risk taking if the right tail of wealth distribution is sufficiently fat. By increasing the scope for tax avoidance, globalization of capital and human capital markets might have increased financial fragility.