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Equity market liberalization, credit constraints and income inequality

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  • Sun, Puyang
  • Sen, Somnath
  • Jin, Shujing

Abstract

This paper provides compelling evidence that equity market liberalization, as the most efficient way to smooth financial market frictions such as credit constraints, can alleviate persistent cross-dynastic income inequality by promoting increased human capital accumulation. The authors examine the effect of equity market liberalization on inequality by using data from 72 countries for 1980-2006. Their measured effect is robust to alternative measures of equity market liberalization. Finally, the authors show that foreign equity flows benefit initially less-active stock markets more than the active ones, providing evidence that foreign equity flows act as a substitute for domestic financial markets. This finding emphasizes the possibility of reducing inequality and poverty through equity market liberalization.

Suggested Citation

  • Sun, Puyang & Sen, Somnath & Jin, Shujing, 2013. "Equity market liberalization, credit constraints and income inequality," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 7, pages 1-28.
  • Handle: RePEc:zbw:ifweej:201312
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    File URL: http://dx.doi.org/10.5018/economics-ejournal.ja.2013-12
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    References listed on IDEAS

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    1. Oded Galor & Omer Moav, 2004. "From Physical to Human Capital Accumulation: Inequality and the Process of Development," Review of Economic Studies, Oxford University Press, vol. 71(4), pages 1001-1026.
    2. Greenwood, Jeremy & Jovanovic, Boyan, 1990. "Financial Development, Growth, and the Distribution of Income," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1076-1107, October.
    3. Galor, Oded & Tsiddon, Daniel, 1997. "Technological Progress, Mobility, and Economic Growth," American Economic Review, American Economic Association, vol. 87(3), pages 363-382, June.
    4. Thorsten Beck & Asli Demirgüç-Kunt & Maria Soledad Martinez Peria, 2008. "Banking Services for Everyone? Barriers to Bank Access and Use around the World," World Bank Economic Review, World Bank Group, vol. 22(3), pages 397-430, November.
    5. Georg R. G. Clarke & Lixin Colin Xu & Heng-fu Zou, 2006. "Finance and Income Inequality: What Do the Data Tell Us?," Southern Economic Journal, Southern Economic Association, vol. 72(3), pages 578-596, January.
    6. Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2005. "Does financial liberalization spur growth?," Journal of Financial Economics, Elsevier, vol. 77(1), pages 3-55, July.
    7. Galor, Oded & Tsiddon, Daniel, 1997. "The Distribution of Human Capital and Economic Growth," Journal of Economic Growth, Springer, vol. 2(1), pages 93-124, March.
    8. Laeven, Luc & Levine, Ross & Michalopoulos, Stelios, 2015. "Financial innovation and endogenous growth," Journal of Financial Intermediation, Elsevier, vol. 24(1), pages 1-24.
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    11. Asli Demirgüç-Kunt & Ross Levine, 2009. "Finance and Inequality: Theory and Evidence," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 287-318, November.
    12. repec:dau:papers:123456789/10091 is not listed on IDEAS
    13. Becker, Gary S & Tomes, Nigel, 1979. "An Equilibrium Theory of the Distribution of Income and Intergenerational Mobility," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1153-1189, December.
    14. Manova, Kalina, 2008. "Credit constraints, equity market liberalizations and international trade," Journal of International Economics, Elsevier, vol. 76(1), pages 33-47, September.
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    More about this item

    Keywords

    income inequality; equity market liberalization; human capital; economic growth;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • G0 - Financial Economics - - General
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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