Understanding Inequality Throughout Production and Financial Activities

The relationships between inequality and economic activities with a financial system as a financing source is analyzed.An endogenous growth model with human, physical, and financial capitals, diminishing returns, constant scale effects, and heterogeneous agents is outlined.Heterogeneity comes from capital endowments in agents, allowing to introduce a financial system into the economy.Macroeconomic equilibrium, distributional dynamics, and long-run shocks due to the interaction between economic growth, inequality, and financial system are characterized.An empirical study is conducted to test the theoretical findings using LS Panel Data techniques with fixed and random effects estimations.The econometric model is fed with information drawn from the Penn World Table for 81 countries during 1970 -2019.Main results are: a) in the absence of a financial system, poor households will allocate less time to leisure if they want to consume more, increase human capital or both; b) physical and human capital ratio of the economy relies only in one sector when there is none financial system.Consequently, economic growth rate is lower since only one sector performs production activities; c) increases in output lead to increases in inequality; d) inequality decreases when human capital goes up; e) physical capital generates small and positive changes in inequality; f) financial capital causes positive impacts on inequality; g) inequality decreases if total factor productivity increases; h) empirical evidence verifies theoretical findings.