DP11094 Does Financial Deregulation Boost Top Incomes? Evidence from the Big Bang

Author(s): Julia Tanndal, Daniel Waldenström
Publication Date: February 2016
Keyword(s): income inequality, institutions, synthetic control group
JEL(s): D31, G28, H24, J30, N20
Programme Areas: Public Economics, Financial Economics, Economic History
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11094

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.