Income distribution, growth and financial development: A cross countries analysis

Income inequality is an important economic issue faced by most of the developed and developing countries. Many attempts have been made to identify a link between economic growth and income inequality in the past. However, the literature is not conclusive about the relationship between economic development and income inequality. This study attempts to analyze the factors responsible for income inequality among the different groups of countries at different stages of economic growth and test the Kuznet's hypothesis by breaking panel of countries into four sub-panels; low income, lower middle income, upper income and higher income countries. In this study a larger set of variables are utilized for investigating the cross country differences in income inequality. The results of the study find the evidence of the existence of inverted U-shaped hypothesis for income growth. Financial development reduces the inequalities in income distribution irrespective of stage of development, and hence negates the inverted U-shaped relationship between inequality and financial development.