Working Paper: CEPR ID: DP15745
Authors: Massimo Massa; Si Cheng; Hong Zhang
Abstract: 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
Keywords: financial globalization; income inequality; delegated portfolio management; mutual funds
JEL Codes: D31; D63; G15; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| foreign capital inflows delegated through global mutual funds (F21) | reduction in the income of the top 1% (D31) |
| large delegated foreign inflows (F21) | selling concentrated, profitable assets (G31) |
| selling concentrated, profitable assets (G31) | decrease in future cash flow rights for rich families (D14) |
| decrease in future cash flow rights for rich families (D14) | reduction in income inequality (D31) |
| financial globalization (F30) | reduction in income inequality (D31) |