Financial structure, bank competition and income inequality

Abstract

This paper empirically investigates the contribution of finance to income inequality with particular emphasis on the role of financial structure (i.e., stock market orientation) and banking market structure (bank market power), an aspect that has been overlooked in the literature. It employs recently developed cointegration techniques that take into account cross-section correlation and simultaneity in non-stationary panels. The paper finds that income inequality increases with financial deepening but decreases with a more market-oriented financial system. It is also found that greater concentration, less competition in the banking sector strengthens income inequality. These effects are found stronger during the banking crisis period, for high-income countries or countries with better quality of political institutions. The data thus suggest that financial reform toward promoting stock market development, enhancing competition or lessening concentration in the banking sector is beneficial to income distribution.