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The Effects of Financial Development on Income Inequality and Poverty

This paper examines the effects of financial development on income inequality and poverty. The results of both cross-country and panel data regressions suggest that inequality and poverty are reduced not only through enhanced loan markets, but also through more developed stock markets. We show that ethnic diversity and the distribution of land are significant and robust determinants of both income inequality and poverty. Finally, we find evidence that government spending leads to a reduction in income inequality in high income countries. In low income countries, however, we find no significant effect.

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File URL: http://www.cer.ethz.ch/research/WP-10-127.pdf
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Paper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series CER-ETH Economics working paper series with number 10/127.

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Length: 40 pages
Date of creation: Mar 2010
Date of revision:
Handle: RePEc:eth:wpswif:10-127
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  1. Easterly, William, 2001. " The Middle Class Consensus and Economic Development," Journal of Economic Growth, Springer, vol. 6(4), pages 317-35, December.
  2. George Clarke & Lixin Colin Xu & Heng-fu Zou, 2003. "Finance and Income Inequality: Test of Alternative Theories," CEMA Working Papers 493, China Economics and Management Academy, Central University of Finance and Economics.
  3. Alesina, Alberto, et al, 2003. " Fractionalization," Journal of Economic Growth, Springer, vol. 8(2), pages 155-94, June.
  4. Zhang, Lei, 2008. "Political economy of income distribution dynamics," Journal of Development Economics, Elsevier, vol. 87(1), pages 119-139, August.
  5. Ross Levine, 2004. "Finance and Growth: Theory and Evidence," NBER Working Papers 10766, National Bureau of Economic Research, Inc.
  6. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-98, April.
  7. Daron Acemoglu & Simon Johnson, 2005. "Unbundling Institutions," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 949-995, October.
  8. 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.
  9. Nils Herger & Roland Hodler & Michael Lobsinger, 2007. "What determines Financial Development? Culture, Institutions, or Trade," DEGIT Conference Papers c012_033, DEGIT, Dynamics, Economic Growth, and International Trade.
  10. Baqir, Reza & Easterly, William & Alesina, Alberto, 1999. "Public Goods and Ethnic Divisions," Scholarly Articles 4551797, Harvard University Department of Economics.
  11. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  12. Lennart Erickson & Dietrich Vollrath, 2004. "Dimensions of Land Inequality and Economic Development," IMF Working Papers 04/158, International Monetary Fund.
  13. Daron Acemoglu & Simon Johnson & James A. Robinson, 2000. "The Colonial Origins of Comparative Development: An Empirical Investigation," NBER Working Papers 7771, National Bureau of Economic Research, Inc.
  14. Bencivenga, Valerie R & Smith, Bruce D, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 195-209, April.
  15. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
  16. Alberto Alesina & Roberto Perotti, 1993. "Income Distribution, Political Instability, and Investment," NBER Working Papers 4486, National Bureau of Economic Research, Inc.
  17. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert W., 1998. "Law and Finance," Scholarly Articles 3451310, Harvard University Department of Economics.
  18. Thorsten Beck & Asli Demirguc-Kunt & Ross Levine, 2004. "Finance, Inequality, and Poverty: Cross-Country Evidence," NBER Working Papers 10979, National Bureau of Economic Research, Inc.
  19. Patrick Honohan, 2004. "Financial development, growth, and poverty: how close are the links?," Policy Research Working Paper Series 3203, The World Bank.
  20. Atje, Raymond & Jovanovic, Boyan, 1993. "Stock markets and development," European Economic Review, Elsevier, vol. 37(2-3), pages 632-640, April.
  21. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2003. "Law and finance: why does legal origin matter?," Journal of Comparative Economics, Elsevier, vol. 31(4), pages 653-675, December.
  22. Barro, Robert J, 2000. " Inequality and Growth in a Panel of Countries," Journal of Economic Growth, Springer, vol. 5(1), pages 5-32, March.
  23. Galor, Oded & Zeira, Joseph, 1993. "Income Distribution and Macroeconomics," Review of Economic Studies, Wiley Blackwell, vol. 60(1), pages 35-52, January.
  24. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  25. De Gregorio, Jose & Lee, Jong-Wha, 2002. "Education and Income Inequality: New Evidence from Cross-Country Data," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 48(3), pages 395-416, September.
  26. Badi H. Baltagi & Panicos O. Demetriades & Siong Hook Law, 2007. "Financial Development, Openness and Institutions: Evidence from Panel Data," Discussion Papers in Economics 07/05, Department of Economics, University of Leicester.
  27. Kristin J. Forbes, 2000. "A Reassessment of the Relationship between Inequality and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 869-887, September.
  28. Perotti, Roberto & Alesina, Alberto, 1996. "Income Distribution, Political Instability, and Investment," Scholarly Articles 4553018, Harvard University Department of Economics.
  29. Easterly, William, 2007. "Inequality does cause underdevelopment: Insights from a new instrument," Journal of Development Economics, Elsevier, vol. 84(2), pages 755-776, November.
  30. Rajan, Raghuram G. & Zingales, Luigi, 2003. "The great reversals: the politics of financial development in the twentieth century," Journal of Financial Economics, Elsevier, vol. 69(1), pages 5-50, July.
  31. repec:ner:tilbur:urn:nbn:nl:ui:12-3125518 is not listed on IDEAS
  32. Deininger, Klaus & Squire, Lyn, 1998. "New ways of looking at old issues: inequality and growth," Journal of Development Economics, Elsevier, vol. 57(2), pages 259-287.
  33. Kenneth L. Sokoloff & Stanley L. Engerman, 2000. "Institutions, Factor Endowments, and Paths of Development in the New World," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 217-232, Summer.
  34. King, Robert G. & Levine, Ross, 1993. "Finance, entrepreneurship and growth: Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 513-542, December.
  35. Addington Coppin & Reed Neil Olsen, 1998. "Earnings and ethnicity in Trinidad and Tobago," Journal of Development Studies, Taylor & Francis Journals, vol. 34(3), pages 116-134.
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