The Surge of Wall Street and The Rise in Income Inequality - Do they share the same root ?

Since 1980, the U.S. economy has witnessed simultaneously two macroeconomic themes: (i) the substantial growth of the financial sector, and (ii) the significant rise in income inequality. At the same time, there was a crucial change in the financial market where a wide range of new financial assets were introduced. This paper, by presenting a simple model of the interaction between the financial and real sectors, shows that the appearance of new financial instruments can generate both above themes. It can also explain the dominance of Wall Street against Main Street (non-financial sectors) in the top income earners category.