The multidimensionality of financial development and income inequality: A panel Bayesian model averaging approach

Abstract

We examine the effect of financial development on income inequality. We differentiate our work from previous research by considering a rich set of different aspects of financial development (depth and efficiency of and access to financial markets and institutions) and employing panel Bayesian model averaging to address regression model uncertainty. Examining 35 economic, political, financial, social and institutional determinants of income inequality (and top income shares) in 94 countries over 2000–2014, we find that finance exerts a complex effect on within-country inequality. Access to finance and greater efficiency of financial intermediaries robustly reduce income inequality. On the other hand, greater depth of financial markets and financial institutions is associated with greater inequality, mostly because it increases top income shares.