Working Paper: CEPR ID: DP8391
Authors: Augustin Landier; Guillaume Plantin
Abstract: 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.
Keywords: financial instability; tax avoidance
JEL Codes: G01; H26
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inequality (D63) | financial risk (G32) |
| inequality (D63) | risk-seeking behavior (D81) |
| political incentives (D72) | risk-taking behavior (D91) |
| tax avoidance (H26) | risk-seeking preferences (D81) |
| convexity of post-tax wealth (H21) | risk-seeking preferences (D81) |