Finance and Inequality: Channels and Evidence

41 Pages Posted: 10 Jul 2007

See all articles by Stijn Claessens

Stijn Claessens

Bank for International Settlements (BIS)

Enrico C. Perotti

University of Amsterdam - Finance Group; Centre for Economic Policy Research (CEPR); Tinbergen Institute

Date Written: June 26, 2007

Abstract

We provide a framework to interpret the recent literature on financial development and inequality. In many developing countries, access to funding and financial services by firms and households is still very skewed. Recent evidence suggests that poor access does not only reflect economic constraints but also barriers erected by insiders. Inequality affects the distribution of political influence, so financial regulation often is easily captured by established interests in unequal countries. Captured reforms deepen rather than broaden access, as small elites obtain most of the benefits while risks are socialized. Financial liberalization motivated to increase access may in practice increase fragility and inequality, and lead to political backlash against reforms. Thus financial reforms may succeed only if matched by a buildup in oversight institutions.

Keywords: financial development, entry, inequality, politics, access to financial services

JEL Classification: O11, O16, G00, G18, P50, N20, D72, P16

Suggested Citation

Claessens, Stijn and Perotti, Enrico C., Finance and Inequality: Channels and Evidence (June 26, 2007). Available at SSRN: https://ssrn.com/abstract=998468 or http://dx.doi.org/10.2139/ssrn.998468

Stijn Claessens (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Enrico C. Perotti

University of Amsterdam - Finance Group ( email )

Plantage Muidergracht 12
Amsterdam, 1018 TV
Netherlands
+31 20 525 4159 (Phone)
+31 20 525 5285 (Fax)

HOME PAGE: http://www.fee.uva.nl/fm/people/pero.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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