Income inequality, financial development and culture

Abstract

In this study, we examine the effect that financial development has on income inequality by taking into account the role of culture and ancestral predicted genetic diversity. The relation between income inequality and financial development has been examined through several studies along with a variety of macroeconomics variables. However, little insight has been shed concerning the influence of culture and ancestral characteristics on this relation. Within an updated panel dataset we conduct empirical analysis with careful examination of the available literature. We find that, among the baseline determinants of income inequality, human capital and predicted genetic diversity have a negative statistically significant relation with income inequality which is robust to all estimations that have been conducted. Also, differently to main literature, financial development seems to have a positive effect on income inequality, when ancestral characteristics and culture are taken under consideration. Specifically, we find that the level of development in financial depth and financial efficiency, increases income inequality, while the level of development in financial access and financial stability seems to decrease it but only slightly, when in the model are included variables related to culture.