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Equities and Inequality

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Abstract

This paper studies the relationship between investor protection, the development of financial markets and income inequality. In the presence of market frictions, investor protection promotes financial development by raising confidence and reducing the costs of external financing. Developed financial systems spread risk among financiers and firms, allocating them to the agents bearing them best. Therefore, financial development plays the twofold role of encouraging agents to undertake risky enterprises and providing them with insurance. By increasing the number of risky projects, it raises income inequality. By extending insurance to more agents, it reduces it. As a result, the relationship between financial development and income inequality is hump-shaped. Empirical evidence from a cross-section of sixty-nine countries, as well as a panel of fifty-two countries over the period 1976-2000, supports the predictions of the model.

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Bibliographic Info

Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number 737.

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Length: 45 pages
Date of creation: 11 May 2005
Date of revision:
Handle: RePEc:hhs:iiessp:0737

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Postal: Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden
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Fax: +46-8-161443
Web page: http://www.iies.su.se/
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Keywords: Income inequality; financial development; capital market frictions; investor protection; instrumental variables; dynamic panel data;

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References

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Cited by:
  1. Abu N. M., Wahid & Muhammad, Shahbaz & Pervez, Azeem, 2011. "Inflation and financial sector correlation: the case of Bangladesh," MPRA Paper 32935, University Library of Munich, Germany, revised 20 Aug 2011.
  2. Bittencourt, Manoel, 2011. "Inflation and financial development: Evidence from Brazil," Economic Modelling, Elsevier, vol. 28(1), pages 91-99.
  3. Manoel Bittencourt, 2008. "Financial Development and Inequality: Brazil 1985-1994," Working Papers 86, Economic Research Southern Africa.
  4. Bertola, Giuseppe, 2007. "Finance and Welfare States in Globalizing Markets," CEPR Discussion Papers 6480, C.E.P.R. Discussion Papers.
  5. Muhammad, Shahbaz & Tiwari, Aviral & Reza, Sherafatian-Jahromi, 2012. "Financial Development and Income Inequality: Is there any Financial Kuznets curve in Iran?," MPRA Paper 40899, University Library of Munich, Germany, revised 26 Aug 2012.

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