1. Finance and Opportunity
Financial Systems and Intergenerational Persistence of Relative Incomes

2. 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

4. 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

5. Same median income Poverty differs due to income distribution
More people live in poverty in the red economy than the blue economy
Poverty Line

6. 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)

7. Two Income Distributions: Different rates of growth & poverty alleviation
Wider income distribution might spur growth
Savings
Incentives
Poverty Line

8. 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

9. But, enormous complications too …
People’s 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

10. 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

11. How would financial reforms work?
Rather than provide a balanced review of the literature, we simply advertise a few possibilities …

12. Finance & intergenerational persistence
y(i,t) = h(i,t)*w(t) + a(i,t)*r(i,t)
h(i,t) = H{b(i,t),s(i,t)}; H/b > 0, H/s > 0, H/bs > 0
Efficiency  allocate school based on brains
But: s(i,t)=S{b(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)=S{b(i,t)}

13. Finance & intergenerational persistence
y(i,t) = h(i,t)*w(t) + a(i,t)*r(i,t)
r(i,t) = R{e(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)=R{e(i,t)}

14. 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?

15. 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

16. Financial development reduces Gini

17. Financial development reduces poverty
At median, 45-50% of finance’s reduction of poverty operates through income distribution
Financial development reduces poverty

18. But, Better measures? Policy reforms? Financial development?
Access to financial services
Better identification strategies?
Mechanisms?

19. 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?