Economic Theory

, Volume 63, Issue 4, pp 997–1025

Wealth inequality and financial development: revisiting the symmetry breaking mechanism

Research Article

DOI: 10.1007/s00199-016-0977-0

Cite this article as:
Zhang, H. Econ Theory (2017) 63: 997. doi:10.1007/s00199-016-0977-0
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Abstract

Matsuyama (Econometrica 72(3):853–884, 2004) shows that financial integration may lead to income polarization among inherently identical countries, if these countries are financially underdeveloped, a result he calls “symmetry breaking.” By introducing the minimum investment requirement and within-country wealth inequality into Matsuyama’s framework, I show that wealth inequality is as important as financial development in determining the possibility of symmetry breaking. I then address three practical issues in this model, e.g., the conditions of financial integration, the domestic financial crisis and capital controls, and the world interest rate changes and income volatility.

Keywords

Financial frictions Financial globalization Minimum investment requirements Symmetry breaking Wealth inequality 

JEL Classification

E44 F41 

Copyright information

© Springer-Verlag Berlin Heidelberg 2016

Authors and Affiliations

  1. 1.School of Economics, Singapore Management UniversitySingaporeSingapore

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