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THE POLITICS OF FINANCIAL DEVELOPMENT AND CAPITAL ACCUMULATION

Published online by Cambridge University Press:  25 September 2017

Tarishi Matsuoka ,
Katsuyuki Naito  and
Keigo Nishida
Tarishi Matsuoka
Affiliation:
Tokyo Metropolitan University
Katsuyuki Naito
Affiliation:
Asia University
Keigo Nishida*
Affiliation:
Fukuoka University
*
Address correspondence to: Keigo Nishida, Faculty of Economics, Fukuoka University, 8-19-1, Nanakuma, Jonan-ku, Fukuoka, 814-0180, Japan; e-mail: knishida@fukuoka-u.ac.jp.
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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.

Keywords

Financial DevelopmentEconomic DevelopmentIncome InequalityMajority Voting
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 1 , January 2019 , pp. 358 - 383
Copyright
Copyright © Cambridge University Press 2017 

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Footnotes

We are grateful to Akihisa Shibata, Kazuhiro Yuki, Kazuo Mino, Kenn Ariga, and the seminar participants at Kyoto University for their helpful comments and suggestions. We are also grateful to an anonymous associate editor and two anonymous referees for their helpful suggestions. This work has received financial support from the Central Research Institute of Fukuoka University (No. 144002) and the Joint Research Program of KIER.

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