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Title: Does Financial Deregulation Boost Top Incomes? Evidence from the Big Bang

Author(s): Julia Tanndal and Daniel Waldenström

Publication Date: February 2016

Keyword(s): income inequality, institutions and synthetic control group

Programme Area(s): Economic History, Financial Economics and Public Economics

Abstract: This study estimates the impact of financial deregulation on top income shares. Using the novel econometric method of constructing synthetic control groups, we show that the "Big Bang"-deregulations in the United Kingdom in 1986 and Japan 1997{1999 increased the share of pre-tax incomes going to top earners by over 20 percent in the U.K. and over 10 percent in Japan. The effect is strongest in the top five percentiles in the U.K. whereas it is mainly driven by the lower part of the top decile in Japan. The findings are robust to placebo tests, alternative ways to construct synthetic controls and scrutiny of post-treatment trends. Higher earnings among financial sector employees appear to be an important mechanism behind this result.

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Bibliographic Reference

Tanndal, J and Waldenström, D. 2016. 'Does Financial Deregulation Boost Top Incomes? Evidence from the Big Bang'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11094