Financial Development and Income Inequality

We investigate the impact of financial development on income inequality differentiating between depth, efficiency and access to financial markets and institutions. We apply panel Bayesian model averaging framework to address model uncertainty to reveal that financial development has complex influence on the income distribution within countries. The access to and efficiency of banking decrease income inequality. The size of the markets has no influence on overall income inequality, but contributes to the increasing top income shares. Moreover, unemployment along with investment into non-tangible assets increase income inequality while higher redistribution and physical capital investment imply lower levels of inequality.