Finance and Income Inequality: Test of Alternative Theories

By George R. G. Clarke, Lixin Colin Xu, HENG-FU ZOU. 2003

229 citations recorded by the source corpus.

Although theoretical models make distinct predictions about the relationship between financial sector development and income inequality, little empirical research has been conducted to compare their relative explanatory power. The authors examine the relation between financial intermediary development and income inequality in a panel data set of 91 countries for the period 1960-95. Their results provide evidence that inequality decreases as economies develop their financial intermediaries, consistent with the theoretical models in Galor and Zeira (1993) and Banerjee and Newman (1993). Moreover, consistent with the insight of Kuznets, the relation between the Gini coefficient and financial intermediary development appears to depend on the sectoral structure of the economy: a larger modern sector is associated with a smaller drop in the Gini coefficient for the same level of financial intermediary development. But there is no evidence of an inverted-U-shaped relation between financial sector development and income inequality, as suggested by Greenwood and Jovanovic (1990). The results are robust to controlling for biases introduced by simultaneity.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/0ed6d2e03e641a98b2e39e7eac5bcfb8e05ec9f1

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Citations in the corpus

Financial Development and Income Inequality: Is There Any Financial Kuznets Curve in Iran? (2014, result): “Our results are consistent with the line of literature such as Clarke et al. (2003, 2007), Rehman et al. (2008), Kim and Lin (2011), Rötheli (2011) Batuo et al. (2012), Nikoloski (2012).”
Financial development and income inequality in Pakistan: An application of ARDL approach (2011, methodology): “Clarke et al. (2003, 2007) examined the impact of financial development on income inequality for both developing and developed nations.”
Financial development and income inequality: a panel data approach (2011, methodology): “We follow the approach of Nikoloski (2012) by using a levels-log specification and also test the approach of Clarke et al. (2003, 2006) with different control variables and OLS.”
Urbanization’s effects on the urban-rural income gap in China: A meta-regression analysis (2020, background): “Nonetheless, empirical evidence also finds that financial development has narrowed URIG in China (Clarke et al., 2003).”
Access to Financial Services : A Review of the Issues and Public Policy Objectives (2005, background): “The indirect effects include the effects of foreign banks on the overall banking system through greater financial stability and improved efficiency of financial intermediation, as reviewed by Clarke et al. (2003). These two effects can make the local banking environment more conducive to lending, in”
Financial Sector Development, Savings Mobilization and Poverty Reduction in Ghana (2005, background): “These same authors (Clarke, Xu and Fou 2002) also provide some support for the Kuznets based theory which suggests that financial development facilitates more migration from the low-income but more egalitarian agricultural sector to the higherincome but unequal modern (industrial and services)…”