von Ehrlich, Maximilian; Seidel, Tobias (February 2016). Financial Development and Inequality in the Global Economy (CRED Research Paper 8). Bern: CRED - Center for Regional Economic Development
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We build a heterogeneous-firms model with firm-specific wages and credit frictions to study the role of financial development for inequality in the global economy. If there are many small firms, better access to external funds reduces wage inequality and unemployment. In contrast, if there are many highproductive firms (those that export), financial development may have opposite effects - especially if trade costs
are low. In sum, the implications of financial development for inequality depend on the size distribution of firms and on the costs of exporting. Trade liberalization, however, raises inequality unambiguously.
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