Finance and Opportunity

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Finance and Opportunity

• Financial Systems and Intergenerational
  Persistence of Relative Incomes

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We care about income distribution because

• People care about relative incomes.
• Beyond the level of income growth
• Beyond poverty

3
Same person with the same income Utility differs
due to income distribution
Person i is happier in the red economy
Person j is happier in the blue economy
Person i
Person j
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We care about income distribution because

• People care about relative incomes.
• Beyond the level of income growth
• Beyond poverty
• People care about poverty
• Beyond average income growth.
• Beyond relative incomes

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Same median income Poverty differs due to income
distribution
More people live in poverty in the red economy
than the blue economy
Poverty Line
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We care about income distribution because

• People care about relative incomes.
• Beyond the level of income growth
• Beyond poverty
• People care about poverty
• Beyond average income growth.
• Beyond relative incomes
• People care about growth
• Beyond poverty (and because of poverty)
• Beyond relative incomes

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Two Income Distributions Different rates of
growth poverty alleviation

• Wider income distribution might spur growth
• Savings
• Incentives

Poverty Line
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Two Income Distributions Different rates of
growth poverty alleviation

• So, potentially enormous benefits from
• promoting growth
• alleviating poverty
• while reducing income differences

Narrower distribution Could improve resource
allocation
Poverty Line
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But, enormous complications too

• Peoples policy recommendations and political
  philosophies depend on whether
• Income distribution reflects talent or parental
  wealth
• Individuals have equal opportunities
• Reducing income differences reduces growth
• We study how only one set of policies

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Our message

• Little research on how finance policies impact
• Equality of opportunities
• Intergenerational income dynamics
• Yet, finance is a keystone in theories of
  intergenerational persistence.
• Financial frictions are key, but
• Financial frictions taken as fixed, unchanging
• Finance policies might exert a 1st order impact
  on
• Equality of opportunities
• Growth Poverty Alleviation

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How would financial reforms work?

• Rather than provide a balanced review of the
  literature, we simply advertise a few
  possibilities

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Finance intergenerational persistence

• y(i,t) h(i,t)w(t) a(i,t)r(i,t)
• h(i,t) Hb(i,t),s(i,t) ?H/?b gt 0, ?H/?s gt 0,
  ?H/?b?s gt 0
• Efficiency ? allocate school based on brains
• But s(i,t)Sb(i,t), a(i,t-1)
• Slower growth, less poverty alleviation
• Unequal opportunities
• Intergenerational persistence of relative
  incomes
• Successful Financial Reforms
• Reduce information and transactions costs
• s(i,t)Sb(i,t)

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Finance intergenerational persistence

• y(i,t) h(i,t)w(t) a(i,t)r(i,t)
• r(i,t) Re(i,t), a(i,t)
• Efficiency ? returns entrepreneurial/investment
  talent
• But information / transactions costs ?
  collateral / wealth
• Slower growth, less poverty alleviation
• Unequal opportunities
• Intergenerational persistence of relative
  incomes
• Successful Financial Reforms
• Reduce information and transactions costs
• r(i,t)Re(i,t)

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But, need lots more rigor detail

• Specific financial policies
• Interaction with other policies / initial
  conditions
• Schooling
• Redistributive
• Stage of economic development
• Labor market
• Is it really schooling entrepreneurship?
• How will more efficient capital allocation affect
  income distribution?

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Turning to empirical evidence

• The paper provides an extensive review.
• Plus, this conference will present new evidence.
• So, we will use our own paper to
• Advertise the promise of this line of inquiry
• Advertise directions of future work

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Financial development reduces Gini
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Financial development reduces poverty
At median, 45-50 of finances reduction of
poverty operates through income distribution
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But,

• Better measures?
• Policy reforms?
• Financial development?
• Access to financial services
• Better identification strategies?
• Mechanisms?

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In sum,

• We do not claim financial reforms are the answer.
  
• Rather, we argue that economists have not
  adequately addressed a central question

Do financial policies substantially affect
economic opportunities income distribution?