This paper introduces a model in which greater inequality reduces growth in economies with low levels of financial development but that this effect is attenuated in economies with more developed systems. The model also predicts that individuals in economies with developed financial markets have a higher tolerance to inequality. Using a panel dataset that covers a large number of countries, this paper shows empirical evidence that is consistent with the main predictions of the model. Overall, this paper's major findings highlight that some of the pernicious effects of inequality can be attenuated by improving access to credit. (JEL D3, E6, P1, O4, I2).
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∗We thank all participants at the 21st Annual Meeting of the Latin American and Caribbean Economic Association, the Annual Meeting of the Chilean Economic Society, as well as participants at the Universidad Torcuato Di Tella and the Universidad Adolfo Ibáñez workshops for their useful suggestions. We particularly thank the editor, Areendam Chanda, and one anonymous referee for their comments and suggestions. P.V. wishes to thank the Institute for Research in Market Imperfections and Public Policy, ICM IS130002 (Ministerio de Economía, Fomento y Turismo), for their financial support. Braun: Professor, Business School, Universidad Adolfo Ibáñez, Santiago, 7910000, Chile. Phone +56 (2) 2331 1000, Fax +56 (2) 2278 4413, E-mail matias.braun@ uai.cl Parro: Professor, Business School, Universidad Adolfo Ibáñez, Santiago, 7910000, Chile. Phone +56 (2) 2331 1000, Fax +56 (2) 2278 4413, E-mail francisco.parro@ uai.cl Valenzuela: Professor, Department of Industrial Engineering, Universidad de Chile, Santiago, 7550000, Chile. Phone +56 (2) 2978 4050, Fax +56 (2) 2689 7895, E-mail firstname.lastname@example.org Economic Inquiry (ISSN 0095-2583) Vol. 57, No. 1, January 2019, 410–428
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