7 Summary and Conclusions
The two main goals of this paper are: (1) to present a mechanism through which credit market imperfection may magnify income inequality, and (2) to propose an alternative explanation of Kuznets’ inverted-U Hypothesis. I have shown that credit market imperfection along with minimum investment requirement creates an entrepreneurial rent which has both direct and indirect effects on income inequality. One major advantage of the model presented in this paper is its analytical tractability. However, some cautionary remarks should be pointed out about the predictions of the model. I do not argue that the credit market imperfection alone is responsible for increased income inequality, or that other sources of policy change, structural change, globalization, education policy, etc., are unimportant sources behind increased income inequality. Instead, I argue that credit market imperfection may also magnify income inequality.
At this point, I would like to point out some limitations of the model presented in this paper. First, the model has only one type of capital good and one type of final good. Second, the model does not allow for growth either in technology or labor force. Third, the economy is closed and thus does not interact with other economies. Due to these limitations, I can think of many ways in which the model can be extended. First, there is a shortage of theoretical and empirical research studying the impact of financial sector policies, such as bank regulations and securities law, on persistent inequality, and second, there is no conceptual framework developed in the literature which considers the joint and endogenous evolution of finance, inequality, and economic growth. The present paper represents a step towards research in this direction.
