DP15014 The Matthew effect and modern finance: on the nexus between wealth inequality, financial development and financial technology

Author(s): Jon Frost, Romina Gambacorta, Leonardo Gambacorta
Publication Date: July 2020
Date Revised: July 2020
Keyword(s): banks, Financial Development, financial technology, Fintech, inequality
JEL(s): D63, G10, G21, O15
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15014

This paper analyses the role of financial development and financial technology in driving inequality in (returns to) wealth. Using micro data from the Survey on Household Income and Wealth (SHIW) conducted by the Bank of Italy for the period 1991-2016, we find evidence of the "Matthew effect" - a capacity of wealthy households to achieve higher returns than other households. With an instrumental variable approach, we find that financial development (number of bank branches) and financial technology (use of remote banking) both have a positive association with households' financial wealth and financial returns. While households of all wealth deciles benefit from the effects of financial development and financial technology, these benefits are larger when moving toward the top of the wealth distribution. Still, the economic significance of this gap fell in the last part of the sample period, as remote banking became more widespread.