Financial Development and Its Effect on Inequality: A Case of Fair Profit Maximization, Favoritism, or Discrimination?

Abstract

Financial development negatively affects inequality and poverty in many countries. This research uniquely examines whether the negative effect of financial development on inequality in Israel is also significantly dependent on the gender, ethnic, and religious characteristics of the population. The results suggest that a part of the role that underdeveloped financial systems play in inequality may be due to favoritism toward advantaged majority groups regarding allocation of small business credit. The research has important policy implications regarding the role of financial system regulation and the effect of favoritism in determining inequality and poverty patterns.