Abstract
Abstract This paper provides compelling evidence that equity market liberalization, as the most efficient way to smooth financial market frictions such as credit constraints, can alleviate persistent cross-dynastic income inequality by promoting increased human capital accumulation. The authors examine the effect of equity market liberalization on inequality by using data from 72 countries for 1980–2006. Their measured effect is robust to alternative measures of equity market liberalization. Finally, The authors show that foreign equity flows benefit initially lessactive stock markets more than the active ones, providing evidence that foreign equity flows act as a substitute for domestic financial markets. This finding emphasizes the possibility of reducing inequality and poverty through equity market liberalization.
Highlights
The world has witnessed stunning cross-country differences in income inequality and persistent poverty, in some under-developed and developing countries
The triple interaction term is negatively associated with Gini growth, as we expected, which indicates that foreign equity flow stimulates less-developed domestic stock markets, increases the human capital accumulation, equalizes the income distribution
This paper illustrates that equity market liberalization, an external shock of the financial market, can smooth out financial market frictions such as credit constraints and expand the economic opportunities especially in under-developed domestic stock market for poor
Summary
The world has witnessed stunning cross-country differences in income inequality and persistent poverty, in some under-developed and developing countries. Liberalizing the equity market to receive more foreign equity flow can enrich the supply of domestic financial credit and reduce the financing cost, which means that individuals who did not use those financial services may get the chance to be involved in them In this term, a poor family expands their economic opportunities to invest in education for the generation, which may diminish the persistence of cross-dynastic income inequality. The main purpose of this paper is to show how equity market liberalization could affect the persistent cross-dynastic income inequality through possible effects of credit constraints on the differences in acquiring human capital.
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