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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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Keywords: Income inequality; financial development; capital market frictions; investor protection; instrumental variables; dynamic panel data;

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Citations

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Cited by:
  1. Manoel Bittencourt, 2007. "Inflation and Financial Development: Evidence from Brazil," Ibero America Institute for Econ. Research (IAI) Discussion Papers 165, Ibero-America Institute for Economic Research.
  2. Manoel Bittencourt, 2007. "Financial Development and Inequality: Brazil 1985-1994," Ibero America Institute for Econ. Research (IAI) Discussion Papers 164, Ibero-America Institute for Economic Research.
  3. 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.
  4. Bertola, Giuseppe, 2007. "Finance and welfare states in globalizing markets," CFS Working Paper Series 2007/31, Center for Financial Studies (CFS).
  5. Abu N. M. Wahid & Muhammad Shahbaz & Pervaz Azim, 2011. "Inflation and Financial Sector Correlation: The Case of Bangladesh," International Journal of Economics and Financial Issues, Econjournals, vol. 1(4), pages 145-152.
  6. Alimi, R. Santos, 2014. "Inflation and Financial Sector Performance: The Case Of Nigeria," MPRA Paper 57180, University Library of Munich, Germany.

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