IDEAS home Printed from https://ideas.repec.org/a/taf/eurjfi/v28y2022i1p137-157.html
   My bibliography  Save this article

A theory of financial inclusion and income inequality

Author

Listed:
  • Gerhard Kling
  • Vanesa Pesqué-Cela
  • Lihui Tian
  • Deming Luo

Abstract

We develop a theory linking financial inclusion, defined as access to formal loans and financial assets, to income inequality. Initial inequality of households is modeled by a random variable determining initial endowments. These initial endowments can be used to invest instantaneously in human capital and financial assets. Human capital translates into income based on a strictly concave production function, suggesting optimal levels of investment. Financial assets earn yields which do not depend on the amount invested by individuals. Theoretical predictions are tested using the China Household Finance Survey (CHFS) for 2011 and 2013. Initial conditions modeled by a random variable are replaced by an actual distribution of income or assets to derive theoretical predictions regarding the proportion of the population that might benefit from financial inclusion. Financial inclusion does mitigate under-investment in education – but formal loans do not contribute. Income inequality worsens if households rely on formal or informal loans, whereas access to bank accounts improves households' prospects in the future income distribution. However, households below the 40th percentile of household income do benefit from informal loans.

Suggested Citation

  • Gerhard Kling & Vanesa Pesqué-Cela & Lihui Tian & Deming Luo, 2022. "A theory of financial inclusion and income inequality," The European Journal of Finance, Taylor & Francis Journals, vol. 28(1), pages 137-157, January.
    • Handle: RePEc:taf:eurjfi:v:28:y:2022:i:1:p:137-157
    DOI: 10.1080/1351847X.2020.1792960
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/1351847X.2020.1792960
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/1351847X.2020.1792960?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Donath Asiimire. & Robert Mugabe. & Dr. Nuwatuhaire Benard., 2024. "High Income Levels and Domestic Violence among Couples in Mbarara City, Mbarara District," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 8(6), pages 1558-1568, June.
    2. Zhian Zhiow Augustinne Wong & Ramez Abubakr Badeeb & Abey P. Philip, 2023. "Financial Inclusion, Poverty, and Income Inequality in ASEAN Countries: Does Financial Innovation Matter?," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 169(1), pages 471-503, September.
    3. Arno J. van Niekerk, 2024. "Economic Inclusion: Green Finance and the SDGs," Sustainability, MDPI, vol. 16(3), pages 1-21, January.
    4. Kebede, Jeleta & Naranpanawa, Athula & Selvanathan, Saroja, 2023. "Financial inclusion and income inequality nexus: A case of Africa," Economic Analysis and Policy, Elsevier, vol. 77(C), pages 539-557.
    5. Vavangani Ishtiyaq Nadeem & Khalid Waheed & Arshiya Fathima M.S, 2024. "Financial inclusion of Muslim minority in Vellore, Tamil Nadu," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 53(1), February.
    6. Chenjing Zhang & Qiaoge Li & Di Mao & Mancang Wang, 2023. "Research on the Threshold Effect of Internet Development on Regional Inclusive Finance in China," Sustainability, MDPI, vol. 15(8), pages 1-20, April.
    7. ETUDAIYE-MUHTAR Oyebola Fatima, 2024. "Financial Inclusion And Income Inequality In Nigeria," Management of Sustainable Development, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 16(1), pages 75-87, June.
    8. Suhrab, Muhammad & Chen, Pinglu & Ullah, Atta, 2024. "Digital financial inclusion and income inequality nexus: Can technology innovation and infrastructure development help in achieving sustainable development goals?," Technology in Society, Elsevier, vol. 76(C).
    9. Shang, Rui, 2023. "Divide or dividend: How digital finance impacts educational equality," Finance Research Letters, Elsevier, vol. 55(PA).
    10. Sun, Yizhong & Jin, Keyan & Wang, Deyong & Wu, Qingyang & Li, Zhezhou, 2023. "Revisiting the natural resources-financial development nexus in China: The importance of economic policy uncertainty," Resources Policy, Elsevier, vol. 86(PB).
    11. Victoria I. Okafor & Isaiah O. Olurinola & Ebenezer Bowale & Romanus Osabohien, 2023. "Financial development and income inequality in Africa," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-10, December.
    12. Issa Dianda & Idrissa Ouedraogo & Hamidou Sawadogo, 2024. "Inclusive human development effect of financial inclusion in sub‐Saharan Africa: A gender perspective," Journal of International Development, John Wiley & Sons, Ltd., vol. 36(3), pages 1896-1917, April.
    13. Broader, Jacquelyn, 2024. "Tapping In: Leveraging Open-Loop Fare Payments to Increase Financial Inclusion," Institute of Transportation Studies, Research Reports, Working Papers, Proceedings qt88v9c0wm, Institute of Transportation Studies, UC Berkeley.
    14. Erkişi Kemal & Boğa Semra, 2023. "Does Financial Inclusion Improve Income Equality? The Case of Türkiye," Economics, Sciendo, vol. 11(2), pages 79-95, December.
    15. Ahmad, Ahmad Hassan & Green, Christopher J. & Jiang, Fei & Murinde, Victor, 2023. "Mobile money, ICT, financial inclusion and growth: How different is Africa?," Economic Modelling, Elsevier, vol. 121(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:eurjfi:v:28:y:2022:i:1:p:137-157. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/REJF20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.