Finance and Income Inequality : Test of Alternative Theories

Although theoretical models make distinct predictions about the relationship between financial sector development and income inequality, little empirical research has been conducted to compare their relative explanatory power. The authors examine the relation between financial intermediary development and income inequality in a panel data set of 91 countries for the period 1960-95. Their results provide evidence that inequality decreases as economies develop their financial intermediaries, consistent with the theoretical models in Galor and Zeira (1993) and Banerjee and Newman (1993). Moreover, consistent with the insight of Kuznets, the relation between the Gini coefficient and financial intermediary development appears to depend on the sectoral structure of the economy: a larger modern sector is associated with a smaller drop in the Gini coefficient for the same level of financial intermediary development. But there is no evidence of an inverted-U-shaped relation between financial sector development and income inequality, as suggested by Greenwood and Jovanovic (1990). The results are robust to controlling for biases introduced by simultaneity.

Bibliographic Details

Main Authors:	Clarke, George, Xu, Lixin Colin, Zou, Heng-fu
Language:	English en_US
Published:	World Bank, Washington, DC 2003-03
Subjects:	FINANCIAL SECTOR REFORM, INCOME INEQUALITIES, FINANCIAL INTERMEDIATION, GINI COEFFICIENT AGGREGATE INCOME, AGRICULTURE, ALP, ASSETS, BUSINESS CYCLE, CAPITAL MARKET, CENTRAL BANKS, DATA SET, DEPENDENT VARIABLE, DESCRIPTIVE STATISTICS, DEVELOPED COUNTRIES, DEVELOPING COUNTRIES, DEVELOPMENT INDICATORS, DISTRIBUTION OF WEALTH, ECONOMETRICS, ECONOMIC DEVELOPMENT, ECONOMIC GROWTH, ECONOMIC POLICY, ECONOMIC REVIEW, ECONOMIC STRUCTURE, ECONOMIC STUDIES, ECONOMISTS, EMPIRICAL ANALYSIS, EMPIRICAL LITERATURE, EMPIRICAL MODEL, EMPIRICAL RESULTS, EMPIRICAL STUDIES, EXOGENOUS CHANGES, EXPLANATORY POWER, EXPLOITATION, FINANCIAL DEPTH, FINANCIAL DEVELOPMENT, FINANCIAL INSTITUTIONS, FINANCIAL MARKETS, FINANCIAL SECTOR, FINANCIAL SECTORS, FIXED COSTS, FUNCTIONAL FORM, FUTURE RESEARCH, GDP, GDP PER CAPITA, GINI COEFFICIENT, GROWTH, GROWTH LITERATURE, HOUSEHOLD SURVEYS, HUMAN CAPITAL, INCOME, INCOME DIFFERENCES, INCOME DISTRIBUTION, INCOME GROUPS, INCOME INEQUALITY, INCOME INEQUALITY DATA, INCOME LEVEL, INCOME LEVELS, INCOME QUINTILES, INFLATION, INFLATION RATE, INVESTMENT CLIMATE, LESS DEVELOPED COUNTRIES, LINEAR, LINEAR RELATIONSHIP, LONG-RUN GROWTH, MACROECONOMICS, MARKET CAPITALIZATION, MARKET IMPERFECTIONS, MEASUREMENT ERROR, MEASURING INCOME INEQUALITY, MIDDLE CLASS, MONETARY ECONOMICS, NATURAL LOG, NEGATIVE COEFFICIENT, NEGATIVE RELATIONSHIP, 0 HYPOTHESIS, PER CAPITA INCOME, POLICY, POLICY MAKERS, POLICY OPTIONS, POLICY REFORM, POLICY RESEARCH, POLITICAL ECONOMY, POSITIVE COEFFICIENT, POSITIVE EFFECTS, POSITIVE IMPACT, PRIVATE SECTOR, PROPERTY RIGHTS, PUBLIC GOODS, RANDOM EFFECTS, RELATIONSHIP, RISK MANAGEMENT, SIGNIFICANT NEGATIVE, THEORETICAL MODELS, UNEMPLOYMENT, VALUE ADDED, WAGES, AGGREGATE INCOME,
Online Access:	http://documents.worldbank.org/curated/en/2003/03/2224552/finance-income-inequality-test-alternative-theories https://hdl.handle.net/10986/18276
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