Finance and Inequality

Abstract

While substantial research has shown that financial development, measured by Domestic Credit, reduces income inequality, this paper studies the possibility of the opposite case. Using a broad cross-country sample, it attempts to identify the relationship between income inequality and financial development and how the effects may differ depending on the channel by which finance influences the economy. Through adopting various models, this paper concludes that financial development measured by the size or growth rate of the stock market has a definite positive correlation with higher values of income inequality. Countries with larger, faster growing stock markets have higher, faster growing levels of income inequality. In addition, this paper shows that the increase in income inequality may be due to the rise in income share of the super-rich.