Financial Globalization vs. Income Inequality: The Surprising Role of Delegated Foreign Portfolio Flows

Abstract

We document a surprising finding that foreign portfolio inflows delegated through global mutual funds reduce the income of the top 1%. To rationalize this observation, we utilize a comprehensive database on the worldwide ownership of private and public firms for 2001–2013 to trace income inequality to its microfoundation of firm 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 through which financial globalization mitigates 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 Classification: D31, D63, G15, G23