Banking Development, Economic Structure and Income Inequality
32 Pages Posted: 6 Nov 2013 Last revised: 8 Jul 2016
Date Written: July 5, 2016
Using rich data from the Italian local credit markets (provinces), this paper investigates the impact of local banking development on income inequality and the role of the socioeconomic structure in this link. Exploiting the Italian historical banking regulation to instrument for the local presence of bank branches, we find that local banking development mitigates income inequality and poverty. However, the finance-inequality nexus manifests itself only in relatively advanced areas, suggesting important non-linearities. When we study the structural channels of influence, we obtain evidence that banking development can reduce inequality by affecting geographical mobility and urbanization, while it has modest effects through the development of material infrastructures and human capital.
Keywords: Income inequality; Financial development; Socioeconomic structure
JEL Classification: G21, G38, O15
Suggested Citation: Suggested Citation