Finance and income inequality: test of alternative theories

George Clarke, Lixin Xu and Heng-Fu Zou ()

No 2984, Policy Research Working Paper Series from The World Bank

Abstract: 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.

Keywords: Poverty Impact Evaluation; Environmental Economics&Policies; Health Economics&Finance; Economic Theory&Research; Payment Systems&Infrastructure; Inequality; Economic Theory&Research; Poverty Impact Evaluation; Environmental Economics&Policies; Health Economics&Finance (search for similar items in EconPapers)
Date: 2003-03-31
New Economics Papers: this item is included in nep-dev, nep-fin and nep-mfd
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (73)

Downloads: (external link)
http://www-wds.worldbank.org/external/default/WDSC ... d/PDF/multi0page.pdf (application/pdf)

Related works:
Working Paper: Finance and Income Inequality: Test of Alternative Theories (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wbk:wbrwps:2984

Access Statistics for this paper

More papers in Policy Research Working Paper Series from The World Bank 1818 H Street, N.W., Washington, DC 20433. Contact information at EDIRC.
Bibliographic data for series maintained by Roula I. Yazigi ().