The relationship between financial development and income distribution

Reducing income distribution inequality is one of the main economic issues that every state places emphasis on. As the weight of financial system increases in the economies of countries, the effect of the financial development on the income distribution, which means the increase in the quality, quantity and productivity in the financial system, is considered as valuable to be discussed in the theoretical and empirical literature. As a matter of fact, as of 1990s, the relation between financial development and income distribution was theoretically debated for the first time, and this debate continued to increase until today. Given the assumption that income of the individual within the financial system will be higher than those outside the financial system, with the financial development, it is possible that low-income individuals can generate more income by using intermediary activities through the use of financial markets. It is asserted that this development will lead to decrease in income inequality via the individual who can get more share than the earliest thanks to financial development. This study has been started with a broad theoretical literature search. In the empirical section of the study, the countries grouped by the financial structure index as "not financially developed bank-based countries", "financially developed bank-based countries" and "financially developed market-based countries", were subjected to two separate panel data analyzes for the period 2000-2012. Firstly, effects of the development of the banking system and capital market on the income distribution were analyzed in these three different groups of countries. Then the long-run relationship between the positive and negative shocks of financial development and the positive and negative shocks of income distribution was investigated. As a result of the findings of the study, it has been understood that the development of the banking and capital markets in countries with different financial structures, has different effects on the income distribution. It has been reached to the conclusion that in financially developed country groups, while the capital market has a positive effect on the income distribution, but the banking system has a comparatively more negative impact on the income distribution. Another analysis of the study, the results of the financial structure index for 2000-2012 period that we have calculated by using the financial structure index of Demirguc-Kunt and Levine were compared with the financial structure index established by those mentioned authors for the period 1990-1995, and then have been associated with the income distribution. In this analysis comparing financial structures, it was determined that financial structures of countries changes over time. By considering this change in the financial structures, the countries were grouped and the relationship between financial development and income distribution for those groups was discussed, but no clear conclusion was achieved