The Matthew Effect and Modern Finance: On the Nexus Between Wealth Inequality, Financial Development and Financial Technology

53 Pages Posted: 27 Jul 2020

See all articles by Jon Frost

Jon Frost

Bank for International Settlements; University of Cambridge - Cambridge Centre for Alternative Finance

Leonardo Gambacorta

Bank for International Settlements (BIS); Centre for Economic Policy Research (CEPR)

Romina Gambacorta

Bank of Italy

Multiple version iconThere are 3 versions of this paper

Date Written: June 26, 2020

Abstract

This paper analyses the role of financial development and financial technology in inequality in (returns to) wealth. Using micro data from the Survey on Household Income and Wealth (SHIW) conducted by the Bank of Italy over the period 1991-2016, we find that financial development (number of bank branches) and financial technology (use of remote banking) both have a positive association with households’ financial wealth and financial returns. By applying an instrumental variable approach to control for endogeneity, we find that the two variables are, by and large, substitutes. The economic significance of both decreased in the last part of the sample period, as remote banking became more widespread. Finally, other things equal, the effects of financial development and financial technology increase when moving toward the top of the wealth distribution. This is in line with the so-called “Matthew effect” (Merton, 1968), or the capacity of wealthy households to achieve higher returns than other households.

Keywords: inequality, financial development, banks, financial technology, fintech

JEL Classification: G10, G21, O15, D63

Suggested Citation

Frost, Jon and Gambacorta, Leonardo and Gambacorta, Romina, The Matthew Effect and Modern Finance: On the Nexus Between Wealth Inequality, Financial Development and Financial Technology (June 26, 2020). Bank of Italy Occasional Paper No. 565, Available at SSRN: https://ssrn.com/abstract=3659973 or http://dx.doi.org/10.2139/ssrn.3659973

Jon Frost

Bank for International Settlements ( email )

Basel
Switzerland

University of Cambridge - Cambridge Centre for Alternative Finance ( email )

10 Trumpington Street
Cambridge, CB21QA
United Kingdom

Leonardo Gambacorta

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Romina Gambacorta (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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