Banking development, socioeconomic structure and income inequality

Abstract

Using rich, unique data from the Italian local credit markets (provinces), this paper investigates the impact of local banking development on income inequality and the role of the socioeconomic structure in this link. Exploiting the Italian historical banking regulation to instrument for the local presence of bank branches, we find that local banking development mitigates income inequality. However, the finance-inequality nexus manifests itself only in relatively advanced areas. When we study the structural channels of influence, we uncover evidence that banking development can reduce inequality by affecting geographical mobility and urbanization, while it has modest effects through the development of material infrastructures and human capital.