Too Much Finance and Top-Income Concentration: A Dynamic Panel Data Analysis

This study investigates the effect of financial development on top-income concentration and income inequality. We conduct a dynamic panel estimation using the GMM method for 138 countries including developed and developing economies from 1970 TO –2017. We find that financial development has a nonlinear U-shaped effect on the top 1% and top 10% income shares and Gini coefficients. Private credit reduces inequality when it is under a threshold value, while it raises income inequality above the threshold value. This suggests that too much finance is beneficial only for the top-income group, but detrimental to income distribution for the entire population.