ABSTRACT
Empirical studies on finance and inequality have focused only on the size and not the structure of the sector. This chapter argues that a diversified financial sector, represented by the market share of financial cooperatives, will have a negative correlation with income inequality, in both income inequality levels and period-to-period differences. Using fixed-effects and instrumental variable regression methods, I explore the relationship between the market share of financial cooperatives in the financial sector and income inequality in 67 countries for the period from 1995 to 2014. The findings suggest that the size of financial cooperatives’ credit as percentage of total domestic credit and as percentage of the whole financial market (credit and capital markets) has a statistically significant negative correlation with the level of income inequality only in low- and middle-income countries, and no statistical significance for high-income economies as well as the total sample. More importantly, increasing the share of financial cooperatives in credit and financial markets has a negative correlation with the changes of income inequality. These results remain statistically robust after controlling for the lagged value of the Gini coefficient, other economic and institutional factor and after controlling endogeneity.
