Finance and inequality : Theory and evidence

Abstract

This paper critically reviews the
 literature on finance and inequality, highlighting
 substantive gaps in the literature. Finance plays a crucial
 role in most theories of persistent inequality.
 Unsurprisingly, therefore, economic theory provides a rich
 set of predictions concerning both the impact of finance on
 inequality and about the relevant mechanisms. Although
 subject to ample qualifications, the bulk of empirical
 research suggests that improvements in financial contracts,
 markets, and intermediaries expand economic opportunities
 and reduce inequality. Yet, there is a shortage of
 theoretical and empirical research on the potentially
 enormous impact of formal financial sector policies, such as
 bank regulations and securities law, on persistent
 inequality. Furthermore, there is no conceptual framework
 for considering the joint and endogenous evolution of
 finance, inequality, and economic growth.