Does Financial Development Affect Income Inequality in the U.S. States? A Panel Data Analysis
27 Pages Posted: 23 Jul 2019
Date Written: July 22, 2019
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 whereby financial development linearly increases income inequality for the 50 states. When we divide 50 states into two separate groups of above-average and below-average 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 above-average income-inequality states, whereas an inverted U-shaped relationship exists for below-average income-inequality states. To our knowledge, this paper is the first to examine the role of financial development on U.S. state-level inequality.
Keywords: Income inequality, Panel data, Personal Income
JEL Classification: C33, D31, D63
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