Globalization, Financial Development and Income Inequality

22 Pages Posted: 24 Dec 2014

See all articles by Hiroshi Daisaka

Hiroshi Daisaka

Hitotsubashi University

Taiji Furusawa

University of Tokyo

Noriyuki Yanagawa

University of Tokyo - Faculty of Economics

Date Written: December 2014

Abstract

We analyse the effect of financial development and globalization (i.e. the reduction of trade costs) on income distribution when a financial institution is imperfect. Financial imperfection creates income inequality, by benefiting borrowers (entrepreneurs) and harming lenders through its effect of lowering the capital rental rate. We show that globalization changes income for both borrowers and lenders in the same direction. However, the poorer is the financial institution, the greater its effect for entrepreneurs and the smaller for lenders. We also examine the effect of financial development and globalization in an enriched model where individuals are different in their abilities as well as their capital endowments. We show that financial development mitigates capital misallocation while the reduction of trade costs will not improve efficiency.

Suggested Citation

Daisaka, Hiroshi and Furusawa, Taiji and Yanagawa, Noriyuki, Globalization, Financial Development and Income Inequality (December 2014). Pacific Economic Review, Vol. 19, Issue 5, pp. 612-633, 2014. Available at SSRN: https://ssrn.com/abstract=2542448 or http://dx.doi.org/10.1111/1468-0106.12086

Hiroshi Daisaka (Contact Author)

Hitotsubashi University

2-1 Naka Kunitachi-shi
Tokyo 186-8601
Japan

Noriyuki Yanagawa

University of Tokyo - Faculty of Economics ( email )

7-3-1 Hongo, Bunkyo-ku
Tokyo 113-0033
Japan

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