Financial frictions and wage inequality

Luo

2023

Int. J Fin Econ

Motivated by Rajan's study and existing economic reform theories (especially the lobby theory), we highlight income inequality as a driver of financial liberalisations. However, no evidence yet supports this idea. To verify this liberalisation‐induced‐by‐inequality hypothesis, the nexus of income inequality and financial liberalisations is formalised and empirically investigated in this paper. We utilise an ordered logit model with two‐way fixed effects and panel data from 91 countries to conduct the analyses. The baseline empirical results indicate that income inequality is a positive and significant determinant of financial liberalisations in aggregate and three component indicators. The results for three component indicators remain stable after a series of robustness checks, including mitigating the potential endogeneity via IV‐2SLS, Lewbel instrumental variable technique and difference within group, assessing the bias from the unobservable variables, considering the persistent and learning effects of liberalisations and the interaction effects, alternating the measures of income inequality, reducing business cycle, and using financial reforms rather financial liberalisation as independent variable. The results for aggregate liberalisations are slightly unstable in models with persistent and learning effects. Thus, liberalisation‐induced‐by‐inequality hypothesis is generally confirmed. In addition, the impacts of income inequality on financial liberalisations are widely heterogeneous across countries, the rate of change in income inequality and wealth inequality could also predict the occurrence of financial liberalisations, and the evidence that income inequality makes the poor easier access credits (i.e., Rajan's hypothesis) is found. Finally, the role is investigated of financial liberalisations in shaping banking stability, and we find that financial liberalisations can enhance growth and lower financial risks.

Section: Empirical Results and Analysesmentioning

confidence: 99%

Income distribution, financial liberalisations and banking stability: Theory and international evidence

Luo

2023

Int. J Fin Econ

“…Meantime, wage inequality is an important issue in developing countries. An increasing number of scholars have attached great importance to this issue, and put forward some explanations from different perspectives, including financial friction or capital distortion (Blau, 2018; Bumann & Lensink, 2016; Chao et al.,1993; Das & Mohapatra, 2003; Greenwood & Jovanovic, 1990; Pi & Fan, 2020a, 2020b), government behavior and institutional arrangement (Anwar, 2008a; Mandal & Marjit, 2010; Pi & Fan, 2021; Pi & Zhang, 2018a; Pi & Zhou, 2013), production factor (Anwar, 2008a, 2008b; Beladi et al., 2008; Pi & Zhang, 2018b), environmental policy (Ee et al., 2018; Kuo et al., 2021; Pi & Zhang, 2017), and corporate social responsibility (Ee et al., 2018; Pi & Zhao, 2020), and minimum wage law (Chao et al., 2021; Marjit et al., 2021), etc. Theoretically, so many literatures investigate wage inequality by using general equilibrium models, but only a few studies take the effect of time horizon into account.…”

Section: Introductionmentioning

confidence: 99%

Corporate governance, firm dynamics, and wage inequality

Chao

2022

The Manchester School

This paper investigates the distributive and welfare effects of corporate governance with firm competition. In the short run, where the number of manufacturing firms is given, a better corporate governance can raise both of the skilled and unskilled wage rates, but the skilledunskilled wage gap will be widened in the economy.Nonetheless, in the long run, a better corporate governance causes manufacturing firms to exit, which in turn reallocates some capital to the agricultural sector. This benefits unskilled workers and raises their wages, while reducing the skilled wage rate via the firm-exit effect.The exit of manufacturing firms mitigates the issue of excessive entry of firms, which can improve social efficiency in the long run. As a result, the optimal level of corporate governance is higher in the long run.

“…The existing literatures on the important issue of income and wage inequality within a general equilibrium setting with Cournot competition are mainly concentrated in trade liberalization and factor mobility (Beladi et al., 2019; Chao et al., 2019; Liu et al., 2019), governmental behaviors (Crettez & Fagart, 2009; 2018a Pi & Zhang, 2018a, 2018b; Beladi et al., 2018; Beladi et al., 2020; Pi & Zhang, 2020), environment regulation (Pan & Zhou, 2013; Pi & Zhang, 2017; Ee et al., 2018a; Pi & Shi, 2019; Kuo et al., 2021), financial market or capital market (Chao et al., 1993; Bumann & Lensink, 2016; Blau, 2018; Pi & Fan, 2020, 2022; Yu & Chao, 2021a), nontradable goods and service economy (Oladi & Beladi, 2009; 2021b Yu & Chao, 2021b, 2021c), corporate social responsibility (Ee et al., 2018b; Pi & Zhao, 2020), and corporate governance (Chao & Wang, 2022).…”

Section: Introductionmentioning

confidence: 99%

Corporate profit tax, firm entry with unemployment, and income inequality

Sun

2022

Bulletin of Econ Res

In this paper, we provide a general equilibrium analysis of corporate profit tax on income distribution, unemployment, and wage inequality. With firm dynamics in industrial sector, we identify a new channel through which profit tax affects income and wage inequality: profit tax cut will widen not only the wage gap between skilled and unskilled labor, but also exacerbate the wage inequality of unskilled labor among different sectors. The welfare effect of profit tax cut depends on unemployment deepening (labor‐distortion effect) and more manufacturing firms enter the market (business‐creation effect), eroding the market share of incumbent firms (business‐stealing effect).