The Impacts of Financial Development, Urbanization, and Globalization on Income Inequality: A Regression-Based Decomposition Approach

Abstract

This paper aims to study the impacts of financial development, urbanization, and globalization on income inequality in the People’s Republic of China. It applies the regression-based inequality decomposition approach on a panel dataset, which is aggregated from a unique database of financial development so as to quantify the relative contributions of these three factors, along with other variables such as physical capital and human capital, to income inequality. The findings suggest that financial development, urbanization, and globalization exert a positive impact on income. However, the contributions of urbanization, foreign investment, physical capital, and human capital to regional inequality are positive. Moreover, it is found that financial development is crucial for promoting inclusive growth, since it can stimulate economic growth and is found to be an equalizing factor of inequality.

Keywords: Regression-Based Methods, Inequality Decomposition, Financial Development, Urbanization, Globalization

JEL Classification: C43, F43, O16, R11