THE POLITICS OF FINANCIAL DEVELOPMENT AND CAPITAL ACCUMULATION

Tarishi Matsuoka, Katsuyuki Naito, Keigo Nishida*

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

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.

Original languageEnglish
Pages (from-to)358-383
Number of pages26
JournalMacroeconomic Dynamics
Volume23
Issue number1
DOIs
Publication statusPublished - 2019

Keywords

  • Economic Development
  • Financial Development
  • Income Inequality
  • Majority Voting

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