ABSTRACT
This chapter proposes a model where the structure rather than the size of the financial sector explains its influence on income distribution. It explains the dynamics of income and wealth distribution with credit rationing, and direction of capital transfer from low- and middle-income classes to upper-income classes, compared to the dynamics of distribution with financial cooperatives. Because of information asymmetries, a financial sector dominated solely by profit‐maximizing financial intermediaries will increase income and wealth inequality as it gives preferential access to credit for high‐income agents, whereas a diversified inclusive financial sector with alternative models of finance, like cooperatives, will reduce the inequality gap. No full convergence in income distribution can be realized through finance only, and there is still a need for redistribution policies. Accordingly, an objective function for cooperative financial institutions should define a desired pricing behaviour that can increase the income of members at a rate higher than the average growth rate of the economy.
