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Regional Implications of Financial Market Development: Industry Location and Income Inequality

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  • Maximilian von Ehrlich, Tobias Seidel

Abstract

We develop a heterogeneous-firms model with trade in goods, labor mobility and credit constraints due to moral hazard. Mitigating financial frictions reduces the incentive of high-skilled workers to migrate to one region such that an unequal distribution of industrial activity becomes less likely. Hence, financial market development has opposite regional implications as trade liberalization. While the former leads to more dispersion of economic activity across space, the latter tends to drive clustering. This has immediate implications for income inequality both between regions and skill groups. According to our model, financial development reduces inequality in both dimensions.

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  • Maximilian von Ehrlich, Tobias Seidel, 2013. "Regional Implications of Financial Market Development: Industry Location and Income Inequality," Diskussionsschriften credresearchpaper01, Universitaet Bern, Departement Volkswirtschaft - CRED.
    • Handle: RePEc:rdv:wpaper:credresearchpaper01
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    5. Xiaosu Ye & Lie Ma & Kunhui Ye & Jiantao Chen & Qiu Xie, 2017. "Analysis of Regional Inequality from Sectoral Structure, Spatial Policy and Economic Development: A Case Study of Chongqing, China," Sustainability, MDPI, vol. 9(4), pages 1-17, April.
    6. Irlacher, Michael & Unger, Florian, 2018. "Capital market imperfections and trade liberalization in general equilibrium," Journal of Economic Behavior & Organization, Elsevier, vol. 145(C), pages 402-423.
    7. Florian Unger, 2021. "Credit frictions, selection into external finance and gains from trade," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 54(3), pages 1206-1251, November.
    8. Yiming Zhou, 2020. "Urban agglomeration and heterogeneous firms: a synthesis of Helpman and Melitz," Journal of Economics, Springer, vol. 130(3), pages 275-296, August.
    9. Jelson Serafim, 2021. "Financial deepening, Stock market, Inequality and Poverty: Some African Evidence," Working Papers REM 2021/0177, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    10. Gietl, Daniel & Haufler, Andreas, 2018. "Bonus taxes and international competition for bank managers," European Economic Review, Elsevier, vol. 110(C), pages 41-60.
    11. Dirk Bezemer & Anna Samarina, 2019. "Debt shift, financial development and income inequality," DNB Working Papers 646, Netherlands Central Bank, Research Department.
    12. Bezemer, Dirk & Samarina, Anna, 2016. "Debt Shift, Financial Development and Income Inequality in Europe," Research Report 16020-GEM, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
    13. Carolyn Chisadza & Mduduzi Biyase, 2023. "Financial Development and Income Inequality: Evidence From Advanced, Emerging and Developing Economies," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 18(01), pages 1-27, March.
    14. Song, Yuegang & Paramati, Sudharshan Reddy & Ummalla, Mallesh & Zakari, Abdulrasheed & Kummitha, Harshavardhan Reddy, 2021. "The effect of remittances and FDI inflows on income distribution in developing economies," Economic Analysis and Policy, Elsevier, vol. 72(C), pages 255-267.

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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F15 - International Economics - - Trade - - - Economic Integration
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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