The Kuznets Curve : Determinants of its Shape and the Role of Finance

This article studies growth and income inequality with a model that makes transparent the role of initial resource endowments, the savings rate and financing opportunities. The frame of presentation is the so-called Kuznets curve. We show under what circumstances the inverted U-shaped curve hypothesized by Kuznets emerges and analyze the role a functioning capital market plays for economic growth and the distribution of income. It turns out that when initial income disparities are high and the savings rate is low it cannot be taken for granted that economic growth leads to a more equal income distribution. We further show that with an efficient capital market total income rises faster and further and inequality is always lower than without a functioning capital market. Hence, political and financial decision makers should endeavor to build a stable basic financial infrastructure and research should identify the institutional and regulatory frameworks that promote this aim