Nonlinearity in the financial development-income inequality nexus

The majority of theoretical studies on the relationship between income inequality and financial development argue that financial deepening might be a feasible instrument for improving income distribution. This paper finds that the prediction crucially depends on the stages of financial development that the country is undergoing. The benefits of financial depth only occur if the country has reached a threshold level of financial development. Below this critical value, financial development counteracts income inequality. Our policy implication is that a minimum level of financial development is a necessary precondition for achieving reduction in income inequality through financial development. Journal of Comparative Economics 39 (3) (2011) 310-325. Sungshin Women's University, 249-1 Dongsun-dong 3-ga, Seongbuk-gu, Seoul 136-742, Republic of Korea; Tamkang University, 151 Yingzhuan Road, Dansui Dis., New Taipei City 25137, Taiwan. (C) 2011 Association for Comparative Economic Studies Published by Elsevier Inc. All rights reserved.