Corporate Governance and the Distribution of Wealth: A Political-Economy Perspective

We present a theory in which the corporate governance structure in a country is determined by a political majority and show how this decision is related to the distribution of financial wealth. The main argument is that labor claims are exposed to undiversifiable risk, so voters with small financial stakes may prefer a corporate governance structure that reduces corporate risktaking. We discuss the inflationary experiences of different countries in the first part of the twentieth century and argue that the model may explain the "great reversal" phenomenon identified by Rajan and Zingales [2003].