Finance,income inequality and income redistribution

Using a panel fixed effects model for a large sample of countries covering 1975–2005, we test the hypothesis that income inequality caused by finance (financial development, financial liberalization and banking crises) is related to more income redistribution than inequality caused by other factors. Our results provide evidence in support of this hypothesis. We also find that the impact of inequality on redistribution is conditioned by ethno-linguistic fractionalization. Our findings are robust to the inclusion of several control variables suggested by previous studies.     

Political regimes and income inequality

We construct a theoretically-motivated model of income inequality. Through a pooled regression on an international panel, we demonstrate that political regime (whether extractive, redistributive, or reinvestment-oriented) correlates with within-country income inequality.     

Technological progress and income inequality

Summary This paper examines the effects of Hicks-neutral, Harrod-neutral, and Solow-neutral technological improvements on the distribution of income in an overlapping generations economy with endogenous labor supply and a bequest motive. Income inequality in this model is generated by a stochastic process representing random variations in intergenerational transfers and pure luck. The comparative dynamics analysis trace the effects of the aforementioned technological changes in each and every period after they occur. These effects depend on the nature of the technological change and on the elasticity of substitution.We thank Carl Davidson, James Foster, and two anonymous referees for their useful comments.     

Choosing to keep up with the Joneses and income inequality

We study a variant of the conventional keeping-up-with-the-Joneses setup, in which heterogeneous-ability agents care both about consumption and leisure and receive an utility premium if their consumption exceeds that of the Joneses’. Unlike the conventional setup in which all agents are assumed to want to participate in the rat race of staying ahead of the Joneses, our formulation explicitly permits the option to drop out. Mean-preserving changes in the spread of the underlying ability distribution, via its effect on the economy-wide composition of rat-race participants and drop-outs, have important consequences for induced distributions of leisure and income, consequences that are unobtainable using conventional keeping-up preferences.     

ICT and income inequality: a cross-national perspective

The importance of information and communications technology (ICT) for economic growth and development is widely researched and seemingly well understood, but the effect of such investments on income inequality is less well documented. On the one hand, improvements in infrastructure are expected to expand economic opportunities for previously underserved populations. On the other hand, ICT growth may exacerbate inequality due to differential access and skill premiums. We use panel data from 109 countries during the period 2001–2014 to examine the empirical connection between ICT and income inequality in a cross-national context. Our results suggest that the effect of ICT on income inequality depends both on the specific type of ICT and on the measure of income inequality. In addition, the magnitude of ICT’s effect on income inequality is comparable to that of more traditional forms of economic infrastructure. Finally, we find that the association between ICT and income inequality is conditional on other economic and political characteristics.     

Growth and income inequality: a canonical model

Summary. We develop an endogenous growth model with elastic labor supply, in which agents differ in their initial endowments of physical capital. In this framework, the growth rate and the distribution of income are jointly determined. The key equilibrating variable is the equilibrium labor supply. It determines the rate of return to capital, which in turn affects both the rate of capital accumulation and the distribution of income across agents. We then examine the impact of various structural shocks on growth and distribution. We find that faster growth is associated with a more unequal, contemporaneous distribution of income, consistent with recent empirical findings.Received: 7 October 2004, Revised: 18 February 2005, JEL Classification Numbers: O17, O40.Cecilia García-Peñalosa: Correspondence toGarcía-Peñalosa would like to acknowledge the financial support received from the Institut d’Economie Publique (IDEP), Marseille. Turnovsky’s research was supported in part by the Castor endowment at the University of Washington. The paper has benefited from seminar presentations at the University of California, Riverside, and the University of Kansas, as well as from the comments of an anonymous referee.     

Decomposing US regional income inequality from 1969 to 2009

This article analyses changes in levels and composition of income inequality among US counties from 1969 to 2009. It also decomposes inequality using the Theil coefficient into between-State and within-State inequality. The article finds that income inequality has increased in the period studied with between-State inequality decreasing and within-State inequality increasing. We subsequently decompose income inequality into the proportion arising from differences in productivity and employment–population ratios across counties. The results suggest that inequality arising from differentials in labour productivity has fallen over the period studied while those arising from employment–population ratio differences have increased.     

Redistribution and beliefs about the source of income inequality

Experimental Economics - Previous literature demonstrates that beliefs about the determinants of income inequality play a major role in individual support for income redistribution. This study...     

A new approach to the decomposition of the Gini income inequality ratio

The purpose of this research is to introduce a new approach to the decomposition of the Gini ratio into three components, supporting them with economic and statistical rigorous interpretations. The three components are: (i) the Gini inequalitywithin subpopulations; (ii) thenet contribution of the extended Gini inequalitybetween subpopulations; and (iii) the contribution of theintensity of transvariation between subpopulations. These components are weighted by the product of the population shares times the income shares of the corresponding subpopulations where the weights add to one.The decomposition introduced in this research is applied to the 1990 U.S. family income distribution. The population of families is disaggregated by types into the following subpopulations: (a) married-couple families; (b) male householder, no wife present; and (c) female householder, no husband present.     

Poverty and inequality under income and price dispersions

Abstract.  We introduce an analytical framework for welfare analysis that accounts for changes in the joint distribution of prices and incomes by using parametric formulae of poverty and inequality measures. We propose statistical indicators for the levels, variabilities and a statistical link of price indices and nominal living standards, which are consistent with a bivariate lognormal model. Our analysis provides intuitive insight about the social welfare impact of economic shocks affecting levels, variabilities, and correlation of prices and incomes. The roles of price and income variabilities for poverty and inequality are exhibited, with the possibility of several variation regimes. JEL classification: I32, O15, D31     

Foreign direct investment and China's regional income inequality

China's widening regional income inequality coupled with its pronounced regional disparity in foreign direct investment stock since 1990 has claimed the attention of many scholars. While some researchers confirm regional disparity in China's foreign direct investment, others attribute the widening regional income inequality to this regional disparity. This paper thus assesses the impacts of China's stock of foreign direct investment on its regional income inequality using simultaneous equation model and the Shapley value regression-based decomposition approach. Our results suggest that China's stock of foreign direct investment has accounted for merely 2% of its regional income inequality. Furthermore, the contribution ratio of per capita foreign direct investment stock to China's regional income inequality has relatively been on a steady decline since 2002. The decomposition results also reveal that provincial per capita physical assets account for over 50% of the nation's income inequality and 65% of the increases in income inequality since 1990. The other two important determinants of regional income inequality are province location and educational level. However, educational level is found to have a decreasing effect on regional income inequality.     

Redistributive choices and increasing income inequality: experimental evidence for income as a signal of deservingness

We explore the relation between redistribution choices, source of income, and pre-redistribution inequality. Previous studies find that when income is earned through work there is less support for redistribution than when income is determined by luck. Using a lab experiment, we vary both the income-generating process (luck vs. performance) and the level of inequality (low vs. high). We find that an increase in inequality has less impact on redistribution choices when income is earned through performance than when income results from luck. This result is likely explained by individuals using income differences as a heuristic to infer relative deservingness. If people believe income inequality increases as a result of performance rather than luck, then they are likely to believe the poor deserve to stay poor and the rich deserve to stay rich.     

Income, income inequality, and health: Evidence from China

This paper tests using survey data from China whether individual health is associated with income and community-level income inequality. Although poor health and high inequality are key features of many developing countries, most of the earlier literature has drawn on data from developed countries in studying the association between the two. We find that self-reported health status increases with per capita income, but at a decreasing rate. Controlling for per capita income, we find an inverted-U association between self-reported health status and income inequality, which suggests that high inequality in a community poses threats to health. We also find that high inequality increases the probability of health-compromising behavior such as smoking and alcohol consumption. Most of our findings are robust to different measures of health status and income inequality. Journal of Comparative Economics 34 (4) (2006) 668–693.     

Informal sector, income inequality and economic development

This paper addresses - with the help of numerical simulations - some of the issues relating to income distribution in the context of development of an economy with an informal sector and migration of both low- and high-skilled workers from the rural to the urban area. A major aim has been to see under what conditions we do or do not get an inverted U-shaped curve of income distribution. The paper finds that the tendency always is for the Gini coefficient to rise and then decline. However, once it starts declining, it need not continuously decline; it may rise, then decline, then rise again and indeed rise above the previous peak before starting to decline again and may well end at the end of the simulation at a higher value than at the start. Any case for the redistribution of income is seen to be much stronger at the later stages of development that at earlier stages, even though at later stages, Gini coefficient may be lower than at earlier stages. The policy implications of the findings are considered.     

Consumption,income and earnings inequality in Britain

This paper presents an analysis of the trends in inequality across income, earnings and consumption in Britain since 1978. It documents the episodic nature of inequality growth over this period largely dominated by the inequality ‘boom’ in earnings inequality of the 1980s. It builds a consistent picture across these key measures of inequality to provide a coherent link between the microeconomic and macroeconomic analysis of the evolution of inequality.     

Markups and income inequality: Causal links, 1975-2011

Using data for 20 countries during 1975–2011, this study provides new evidence on the association between the lack of competition, measured by an increase in markups, and income inequality. We find that an increase in markups is positively associated with rising income inequality. More interestingly, not only do extra profits from higher markups accrue to the top-income group, but also, within the top-income group (top 10%), the higher top-income earners (top 1%) tend to benefit disproportionately more than the lower top-income earners (top 5% or 10%). Finally, we highlight the role of labor market policies; the positive relationship between markups and income inequality is less pronounced in countries with better labor protection such as the statutory protection and power of labor unions, generous unemployment benefits, and mandatory minimum wages.     

Exploring the link between household debt and income inequality: an asymmetric approach

We investigate the relationship between household debt and income inequality in the USA, allowing for asymmetry, using data over the period 1913–2008. We find evidence of an asymmetric cointegration between household debt and inequality for different regimes. Our results indicate household debt only responds to positive changes in income inequality, while there is no evidence of falling inequality significantly affecting household debt. The presence of this asymmetry provides further empirical insights into the emerging literature on household debt and inequality.     

Investor protection and income inequality: Risk sharing vs risk taking

This paper studies the relationship between investor protection and income inequality. In the presence of market frictions, better protection makes investors more willing to take on entrepreneurial risk when lending to firms, thereby improving the degree of risk sharing between financiers and entrepreneurs. On the other hand, by increasing risk sharing, investor protection also induces more risk taking. By increasing entrepreneurial risk taking, it raises income dispersion. By reducing the risk faced by entrepreneurs, it reduces income volatility. As a result, the relationship between investor protection and income inequality is non monotonic, since the risk-taking effect dominates at low levels of investor protection, while risk sharing becomes stronger when more risk is taken. Empirical evidence from up to sixty-seven countries spanning the period 1976–2004 supports the predictions of the model.     

Nonlinearity in the financial development–income inequality nexus

The majority of theoretical studies on the relationship between income inequality and financial development argue that financial deepening might be a feasible instrument for improving income distribution. This paper finds that the prediction crucially depends on the stages of financial development that the country is undergoing. The benefits of financial depth only occur if the country has reached a threshold level of financial development. Below this critical value, financial development counteracts income inequality. Our policy implication is that a minimum level of financial development is a necessary precondition for achieving reduction in income inequality through financial development.