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Finance and Income Inequality: What Do the Data Tell Us?

Author

Listed:
  • George R. G. Clarke

    (Research Department, World Bank)

  • Lixin Colin Xu

    (Research Department, World Bank
    Guanghua School of Management, Peking University)

  • Heng-fu Zou

    (Research Department, World Bank)

Abstract

Although there are distinct conjectures about the relationship between finance and income inequality, little empirical research compares their explanatory power. We examine the relationship between finance and income inequality for 83 countries between 1960 and 1995. Because financial development might be endogenous, we use instruments from the literature on law, finance, and growth to control for this. Our results suggest that, in the long run, inequality is less when financial development is greater, consistent with Galor and Zeira (1993) and Banerjee and Newman (1993). Although the results also suggest that inequality might increase as financial sector development increases at very low levels of financial sector development, as suggested by Greenwood and Jovanovic (1990), this result is not robust. We reject the hypothesis that financial development benefits only the rich. Our results thus suggest that in addition to improving growth, financial development also reduces inequality.

Suggested Citation

  • George R. G. Clarke & Lixin Colin Xu & Heng-fu Zou, 2011. "Finance and Income Inequality: What Do the Data Tell Us?," CEMA Working Papers 489, China Economics and Management Academy, Central University of Finance and Economics.
  • Handle: RePEc:cuf:wpaper:489
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    References listed on IDEAS

    as
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    Cited by:

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    2. Sun, Puyang & Sen, Somnath & Jin, Shujing, 2013. "Equity market liberalization, credit constraints and income inequality," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW), vol. 7, pages 1-28.
    3. Bonfiglioli, Alessandra, 2012. "Investor protection and income inequality: Risk sharing vs risk taking," Journal of Development Economics, Elsevier, vol. 99(1), pages 92-104.
    4. Siong Hook Law & Hui Boon Tan, 2009. "The Role Of Financial Development On Income Inequality In Malaysia," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 34(2), pages 153-168, December.
    5. Muhammad Shahbaz & Faridul Islam, 2011. "Financial Development And Income Inequality In Pakistan: An Application Of Ardl Approach," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 36(1), pages 35-58, March.
    6. Majeed, Dr. Muhammad Tariq, 2013. "Inequality, Financial Development and Government: Evidence from Low-Income Developing Countries," MPRA Paper 50296, University Library of Munich, Germany.
    7. Tao Sun & Mr. Tom Gole, 2013. "Financial Structures and Economic Outcomes: An Empirical Analysis," IMF Working Papers 2013/121, International Monetary Fund.

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    More about this item

    JEL classification:

    • D3 - Microeconomics - - Distribution
    • G2 - Financial Economics - - Financial Institutions and Services
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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