The effects of financial deepening on income inequality based on grey incidence analysis: Empirical evidence from China

Abstract

Purpose

The purpose of this paper is to clarify the relationship between income inequality and financial deepening. The majority of theoretical studies on the relationship between them argue that financial deepening has a positive effect on the income inequality. This paper aims to study the case of China, and explores whether the effects of financial deepening on income inequality varies between urban residents and rural residents.

Design/methodology/approach

Using the grey incidence analysis, this paper first calculates the degree of grey incidence between dependent variables, i.e. per capita disposable income of urban residents, per capita net income of rural residents and overall Theil Inequality Index for China, and independent variables, depth of credit, depth of direct financing and depth of insurance. Next, multiple non-linear regression is introduced to build the model. With the method of unit root test and co-integration test, some equations are given to show the clear relationship among the variables.

Findings

The empirical results indicate that the development of credit market does not have a strong relationship both with the growth of income and income inequality. While the development of both the direct financing market and the insurance market is closely related to the growth of income and income inequality.

Originality/value

The results of this paper suggest that the protection of the rights and interests of medium-sized investors is the key for the capital market. Meanwhile, the insurance market should be encouraged to expand in both breadth and depth, which helps to take full advantage of its functions. As for the credit market, more resources should be allocated to those who need them most the small- and medium-sized enterprises, which will contribute to the growth of the income for the majority and narrowing the income gap.

Citation

Zhang, Q. (2014), "The effects of financial deepening on income inequality based on grey incidence analysis: Empirical evidence from China", Grey Systems: Theory and Application, Vol. 4 No. 3, pp. 495-504. https://doi.org/10.1108/GS-02-2014-0005