The Matthew Effect and Modern Finance: On the Nexus Between Wealth Inequality, Financial Development and Financial Technology
53 Pages Posted: 27 Jul 2020
Date Written: June 26, 2020
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: Suggested Citation