Entrepreneurship, Financial Intermediation, and Inequality

Abstract

This paper provides a simple dynamic framework to study the long-run relationship between nancial intermediation and wealth inequality. By considering two types of entrepreneurial nancing (self- nancing and intermediated nancing), I show that wealth inequality is more severe in an economy where all nancing is intermediated than in an economy where some entrepreners rely on self- nancing. This result is consistent with the augmented Kuznets hypothesis that a large scale operation of production and the nancial intermediary development are associated with higher inequality. Keywords: Entrepreneurship; Financial Intermediation; Inequality. JEL classi cation: E21, L26. I am grateful to Munetomo Ando, Ryo Arawatari, and Makoto Nakajima for helpful discussions on an early version of the paper. I also acknowledge a ancial grant from the the Yamada Foundation and a Grant-in-Aid for Scienti c Research (A) (23243049) from the Japanese Ministry of Education, Science, Sports, and Culture. Any remaining errors are my own. ySchool of Economics, Nagoya University, 1 Furo-cho, Chikusa-ku, Nagoya 464-8601, Japan. E-mail: adachi.t@soec.nagoya-u.ac.jp