Working Paper: NBER ID: w15275
Authors: Asli Demirgüç-Kunt; Ross Levine
Abstract: This paper critically reviews the literature on finance and inequality, highlighting substantive gaps in the literature. Finance plays a crucial role in most theories of persistent inequality. Unsurprisingly, therefore, economic theory provides a rich set of predictions concerning both the impact of finance on inequality and about the relevant mechanisms. Although subject to ample qualifications, the bulk of empirical research suggests that improvements in financial contracts, markets, and intermediaries expand economic opportunities and reduce inequality. Yet, there is a shortage of theoretical and empirical research on the potentially enormous impact of formal financial sector policies, such as bank regulations and securities law, on persistent inequality. Furthermore, there is no conceptual framework for considering the joint and endogenous evolution of finance, inequality, and economic growth.
Keywords: Finance; Inequality; Economic Growth; Financial Development
JEL Codes: G00; G15; O16; O43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Improvements in financial systems (O16) | Increased parental investment in education (I24) |
| Increased parental investment in education (I24) | Reduced tendency to withdraw children from schooling during economic shocks (I21) |
| Improvements in financial systems (O16) | Reduced tendency to withdraw children from schooling during economic shocks (I21) |
| Improvements in financial systems (O16) | New firm formation (L26) |
| New firm formation (L26) | Increased labor demand (J23) |
| Improvements in financial systems (O16) | Increased labor demand (J23) |
| Increased labor demand (J23) | Tighter income distribution (D39) |
| Financial sector policies (G28) | Influence on income distribution (E25) |
| Finance can exacerbate inequality through intensive margin effects (G59) | Benefits those already in the system (H55) |
| Finance can reduce inequality through extensive margin effects (G59) | Expanding access to previously excluded groups (I24) |