A theory of financial inclusion and income inequality

Abstract

We develop a theory linking financial inclusion, defined as access to formal loans and financial assets, to income inequality. Initial inequality of households is modeled by a random variable determining initial endowments. These initial endowments can be used to invest instantaneously in human capital and financial assets. Human capital translates into income based on a strictly concave production function, suggesting optimal levels of investment. Financial assets earn yields which do not depend on the amount invested by individuals. Theoretical predictions are tested using the China Household Finance Survey (CHFS) for 2011 and 2013. Initial conditions modeled by a random variable are replaced by an actual distribution of income or assets to derive theoretical predictions regarding the proportion of the population that might benefit from financial inclusion. Financial inclusion does mitigate under-investment in education-but formal loans do not contribute. Income inequality worsens if households rely on formal or informal loans, whereas access to bank accounts improves households' prospects in the future income distribution. However, households below the 40th percentile of household income do benefit from informal loans.

Capital Accumulation, Private Property, and Rising Inequality in China, 1978–2015

“…We assume that y nf follows the same distribution as wealth, which we estimate by applying generalized Pareto interpolation techniques to household wealth surveys and wealth rankings (see Section IB). 22 As for the correlation structure between y f and y nf , on the basis of estimates obtained in countries with adequate micro-files (namely, the United States and France; see Blanchet, Fournier, and Piketty 2017), we use the family of Gumbel copulas with Gumbel parameter θ = 2. 23 Last, we apply a proportional upgrade factor to transform the distribution of personal income y p = y f + y nf into the distribution of national income y.…”

“…In effect, we break down national income y as y = y f + y nf + y g , with y g = government net capital income (including the government's share of undistributed profits) + indirect taxes (net production taxes) received by the government. 22 The distribution of corporate equity is more concentrated than the distribution of wealth in general, so this assumption may lead us to under-estimate the concentration of non-fiscal income y nf . Note also that we do not have complete annual estimates for the distribution of wealth (see below), so for missing years we use linear interpolations.…”

Determinants of financial inclusion across gender in Saudi Arabia: evidence from the World Bank's Global Financial Inclusion survey

“…Financial inclusion is defined as the process of ensuring access of financial services to everyone, particularly the disadvantaged groups in the form of deposits, withdrawals, savings, credit and insurance in a proper legal and institutional environment (Demirg€ uç-Kunt et al, 2013;Ozili, 2020;Kling et al, 2020;Huang et al, 2021). The factors affecting the ownership and usage of financial services among various groups have been evaluated across the globe to understand the process of inclusive development (Swamy, 2014;Senyo and Osabutey, 2020;Aziz and Naima, 2021).…”

Financial inclusion and financial technology: finance for everyone?

“…Kanga et al (2021) show that the diffusion of technology and financial inclusion affect economic growth and investment in fixed and human capital in the long term. Finally, Kling et al (2021) develop a theory that connects financial inclusion to income inequality. It is not guaranteed that increasing financial inclusion leads to lower levels of income inequality.…”