DP8391 Inequality, Tax Avoidance, and Financial Instability
|Author(s):||Augustin Landier, Guillaume Plantin|
|Publication Date:||May 2011|
|Keyword(s):||financial instability, tax avoidance|
|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.