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

51 Pages Posted: 10 Aug 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: July 6, 2020

Abstract

This paper analyses the role of financial development and financial technology in driving inequality in (returns to) wealth. Using micro data from the Survey on Household Income and Wealth (SHIW) conducted by the Bank of Italy for the period 1991-2016, we find evidence of the "Matthew effect" - a capacity of wealthy households to achieve higher returns than other households. With an instrumental variable approach, 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. While households of all wealth deciles benefit from the effects of financial development and financial technology, these benefits are larger when moving towards the top of the wealth distribution. Still, the economic significance of this gap fell in the last part of the sample period, as remote banking became more widespread.

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 (July 6, 2020). BIS Working Paper No. 871, Available at SSRN: https://ssrn.com/abstract=3666377

Jon Frost (Contact Author)

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

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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