TY - JOUR
T1 - THE POLITICS OF FINANCIAL DEVELOPMENT AND CAPITAL ACCUMULATION
AU - Matsuoka, Tarishi
AU - Naito, Katsuyuki
AU - Nishida, Keigo
PY - 2019
Y1 - 2019
N2 - This paper considers the political economy of financial development in an overlapping generations model that incorporates credit market imperfections, and shows that income inequality is a determinant of financial and economic development. Individuals have an opportunity to start an investment project at a fixed cost, but their income to finance the cost is unequal. The government proposes a policy financed by taxation that mitigates credit market imperfections, the implementation of which is determined through majority voting. The policy benefits middle-income individuals who can start the investment only after the implementation of the policy. The policy is, however, against the interest of the rich who wish to block such new entry, and that of the poor who wish to avoid the tax burden. Whether the policy obtains majority support depends on income inequality. High income inequality makes the policy hard to implement, which causes financial and economic underdevelopment.
AB - This paper considers the political economy of financial development in an overlapping generations model that incorporates credit market imperfections, and shows that income inequality is a determinant of financial and economic development. Individuals have an opportunity to start an investment project at a fixed cost, but their income to finance the cost is unequal. The government proposes a policy financed by taxation that mitigates credit market imperfections, the implementation of which is determined through majority voting. The policy benefits middle-income individuals who can start the investment only after the implementation of the policy. The policy is, however, against the interest of the rich who wish to block such new entry, and that of the poor who wish to avoid the tax burden. Whether the policy obtains majority support depends on income inequality. High income inequality makes the policy hard to implement, which causes financial and economic underdevelopment.
KW - Economic Development
KW - Financial Development
KW - Income Inequality
KW - Majority Voting
UR - http://www.scopus.com/inward/record.url?scp=85030853842&partnerID=8YFLogxK
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U2 - 10.1017/S136510051600136X
DO - 10.1017/S136510051600136X
M3 - Article
AN - SCOPUS:85030853842
SN - 1365-1005
VL - 23
SP - 358
EP - 383
JO - Macroeconomic Dynamics
JF - Macroeconomic Dynamics
IS - 1
ER -