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Does Financial Development Affect Income Inequality in the U.S. States? A Panel Data Analysis

Author

Listed:
  • Manoel Bittencourt

    (Department of Economics, University of Pretoria, Pretoria, South Africa)

  • Shinhye Chang

    (Department of Economics, University of Pretoria, Pretoria, South Africa)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Pretoria, South Africa)

  • Stephen M. Miller

    (Department of Economics, University of Nevada, Las Vegas, Nevada,USA)

Abstract

This paper examines the role of financial development on U.S. state-level income inequality in the 50 states from 1976 to 2011, using fixed-effect estimation. We find robust results where by financial development linearly increases income inequality for the 50 states. When we divide 50 states into two separate groups of higher and lower inequality states than the cross-state average inequality, the effect of financial development on income inequality appears non-linear. When financial development improves, the effect increases at an increasing rate for high income inequality states, whereas an inverted U-shaped relationship exists for low-income inequality states. To our knowledge, this paper is the first to examine the role of financial development on U.S. state-level inequality.

Suggested Citation

  • Manoel Bittencourt & Shinhye Chang & Rangan Gupta & Stephen M. Miller, 2018. "Does Financial Development Affect Income Inequality in the U.S. States? A Panel Data Analysis," Working Papers 201803, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201803
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    References listed on IDEAS

    as
    1. Jakob de Haan & Jan-Egbert Sturm, 2016. "How Development and Liberalisation of the Financial Sector is Related to Income Inequality: Some New Evidence," BAFFI CAREFIN Working Papers 1633, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    2. Siong Law & Hui Tan & W. Azman-Saini, 2014. "Financial Development and Income Inequality at Different Levels of Institutional Quality," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 50(S1), pages 21-33.
    3. Ross, D. & Sabot, R. & Birdsall, N., 1995. "Inequality and Growth Reconsidered," Center for Development Economics 142, Department of Economics, Williams College.
    4. Michael T. Owyang & Hannah Shell, 2016. "Measuring Trends in Income Inequality," The Regional Economist, Federal Reserve Bank of St. Louis, issue April.
    5. Zhang, Ruixin & Ben Naceur, Sami, 2019. "Financial development, inequality, and poverty: Some international evidence," International Review of Economics & Finance, Elsevier, vol. 61(C), pages 1-16.
    6. Corak, Miles, 2016. "Inequality from Generation to Generation: The United States in Comparison," IZA Discussion Papers 9929, Institute of Labor Economics (IZA).
    7. Jean-Marc Fournier & Isabell Koske, 2012. "The determinants of earnings inequality: evidence from quantile regressions," OECD Journal: Economic Studies, OECD Publishing, vol. 2012(1), pages 7-36.
    8. Patrick Honohan, 2004. "Financial development, growth, and poverty: how close are the links?," Policy Research Working Paper Series 3203, The World Bank.
    9. Manoel Bittencourt & Shinhye Chang & Rangan Gupta & Stephen M. Miller, 2018. "Does Financial Development Affect Income Inequality in the U.S. States? A Panel Data Analysis," Working Papers 201803, University of Pretoria, Department of Economics.
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    Cited by:

    1. Manoel Bittencourt & Shinhye Chang & Rangan Gupta & Stephen M. Miller, 2018. "Does Financial Development Affect Income Inequality in the U.S. States? A Panel Data Analysis," Working Papers 201803, University of Pretoria, Department of Economics.
    2. Koçak Emrah & Uzay Nısfet, 2019. "The effect of financial development on income inequality in Turkey: An estimate of the Greenwood-Jovanovic hypothesis," Review of Economic Perspectives, Sciendo, vol. 19(4), pages 319-344, December.
    3. Barhoom Faeyzh, 2023. "Revisiting the Financial Development and Income Inequality Nexus: Evidence from Hungary," Acta Universitatis Sapientiae, Economics and Business, Sciendo, vol. 11(1), pages 227-257, October.
    4. Nokulunga Mbona, 2022. "Impacts of Overall Financial Development, Access and Depth on Income Inequality," Economies, MDPI, vol. 10(5), pages 1-23, May.

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    More about this item

    Keywords

    Income inequality; Panel data; Personal Income;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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