Financial bubbles and income inequality

Using a sample of OECD countries, we explore the relationships between stock market bubbles and income inequality. Specifically, we test whether explosive growth in stock prices leads to increased concentration of income at the top of the distribution. Moreover, we investigate the possibility that increased income concentration at the top increases the incidence or severity of asset bubbles. Using instrumental variables techniques, we uncover a positive effect of asset bubbles on the share of income earned by those in the top 1% and top 0.1% of the income distribution. However, this effect is not present when capital gains are excluded from income, supporting the idea that the mechanical effect of bubbles on asset income is a dominant driver of their effect on top income inequality. On the other hand, we also find that concentration of income at the top is associated with an increase in bubbles, whether measured by incidence, duration, or intensity. Moreover, this finding remains when capital gains are excluded from income. Our results suggest that top income inequality, whatever its source, increases the demand for assets, setting the stage for abnormal growth in stock prices.