Equity-financing, income inequality and capital accumulation

The relationship between economic development and income inequality is not neutral vis-à-vis the role of the financial system in responding to the needs of different categories of agents. The literature on persistent inequality shows that taking account of the asymmetric impact of financial imperfections on wealthy and poor agents changes — the Kuznets (1955) relationship between economic development and income inequality. The present paper analyses the effect of equity-based financial intermediation on the evolution of the capital accumulation/income inequality relationship. It is interesting that income inequality disappears when the economy reaches an advanced stage of development, despite the existence of credit market imperfections. •We provide a new model analysing the evolution of income inequality–capital accumulation relationship.•The introduction of equity based financial intermediation instead of debt-based one changes the pace of the relationship.•Income inequality disappears once the economy reaches a second stage of development.