The Effect of Financial Development on Income Inequality in Iran: A Review of the Role of Human Capital

Document Type : Original Article


1 Departement of Economics, PhD student in Economics, International Campus, Ferdowsi University of Mashhad

2 Department of Economics, Faculty of Economic and Administrative Sciences,Ferdowsi University of Mashhad

3 Department of Economics, Faculty of Economic and Political Sciences, Shahid Beheshti University


With homogeneity of human capital, financial institutions in the process of credit allocation, only need to use indices of physical capital, financial strength and credit backgrounds of applicants as the basis for their decision which its consequence is conflicting results in the researches. The new literature, emphasizes the heterogeneity of human capital and explain the existence of a complementary relationship between human and physical capital accumulation and suggests that lack of attention to these aspects, will lead to misleading results. In this paper, we have been studied this relationship in Iran under the premise the heterogeneity of human capital and it has been tested the effect of the combination of human capital and physical capital accumulation on income inequality using threshold regression model. The results over the period 1969-2014 show that, human capital apart from direct effect on income inequality, in combination with physical capital, has a simultaneously separate effect on income inequality.


-   Arestis, P. & Caner, A.(2004), Financial Liberalization and Poverty: Channels of Influence, Levy Economics Institute, Economics Working Paper No. 411.
-   Asad, H. (2012), Effective Financial Development, Inequality And Poverty, University of Exeter, 1-13.
-   Assari, A., Naseri, A. & Aghaei, M.(2009), Impact of Financial Developments on Poverty and Inequality in OPEC Countries , The Economic Reseach,  9 (3), 29-51, (in Persian).
-   Banerjee, A. & Newman, A.(1993), Occupational Choice and the Process of Development, Journal of Political Economy, 101 (2), 274-298.
-   Bencivenga, V. R. & Smith, B. D.(1991), Financial intermediation and endogenous growth, Review of Economics Studies, 58(2), 195-209.
-   Clarke, G., Xu, L. C., Zou, H.( 2006), Finance and income inequality: what do the data tell us? Southern Economic Journal, 72, 578–596.
-   Creane, S., Goyal, R., Mobarak, A.M. & Sab, R.(2004), Financial Sector Development in the Middle East and North Africa, IMF Working Paper, WP/04/201.
-   Dahmardeh N. & Shokri Z.(2010), The Effects of Financial Development on Income Distribution in Iran, Jornal of Economic Research and Policy, 18 (54), 147-164, (in Persian).
-   Elmi Z, Ariani F.(2014), The Effect of Financial Development on The Distribution of Income in MENA Region, Economic Development Research, 2 (7), 29-50, (in Persian) .
-   Enowbi Batuo, M., Guidi, F. & Mlambo, K.(2010), Financial Development and Income Inequality:Evidence from African Countries, MPRA Paper No. 25658.
-   Galor, O. & Moav, O.(2004), From Physical to Human Capital Accumulation: Inequality and the Process of Development. The Review of Economic Studies, 71, 1001-1026.
-   Galor, O. & Zeira, J.(1993), Income Distribution and Macroeconomics, The Review of Economic Studies, 60, 35-52.
-   Greenwood, J. & Jovanovic, B.(1990), Financial Development, Growth, and the Distribution of Income, The Journal of Political Economy, Vol. 98, No. 5, 1076-1107.
-    Hassanzadeh, A., Azvjy, A. & Ghavidel, S.(2006), the effects of microfinance in reducing poverty and income disparities, Jornal of Islamic Economics, 6 (21), 45-68, (in Persian).
-   Homayounifar, M., Cheshmi, A. & Yaghuti Jafarabad, F.(2016), A Survey For the Affects of Financial Development on the Income Inequality in the Selected Islamic Countries, Islamic Economics Study, 9 (17), 37-58, (in Persian).
-   Jaberi Khosroshahi, N., Mohamadvand Nahidi, M. R. & Noroozi, D. (2012), The Effect of Financial Development on Income Inequality in Iran, Journal of Economic Growth and Development Research , 2 (6), 173-208, (in Persian).
-   Levine R.(1997), financial development and economic growth:views and agenda, Journal of Economic Literature, 35(2), 688-726.
-   King, R. G. & Levine, R. (1993), Finance and Growth: Schumpeter Might be Right, The Quarterly Journal of economics, 108, 717-737.
-   Kuznets, S. (1955), Economic Growth and Income Inequality, American Economic Review, 45, 1-28.
-   Liang, Z. (2006), Financial Development And Income Distribution: A System GMM Panel Analysis With Application To Urban China, Journal Of Economic Development, 31(2), 1-21.
-   Mckinnon, R.(1973), Money and Capital in Economic Development, Washington D.C., Brookings Institution.
-   Rajan, R. & Zingales L.(1998), Financial Dependence and Growth, American Economic Review, 88 (3), 5-50.
-   Sameti, M., & Sajedi, Z. S.(2012), The effect of financial development on income distribution: A case study of selected developing countries, Macroeconomics, 7 (14), 37-58, (in Persian).
-   Shahabadi, A. & Amiri, B.(2014), The Effect of financial development on Poverty in Eight Islamic Countries (D8 group), The Journal Of Planning And Budjeting, 18 (4), 27-42, (in Persian).
-   Shahbaz, M. & Islam, F.(2010), Financial Development And Income Inequality In Pakistan: An Application Of ARDL Approach, Journal Of Economic Development, 36(1), 35-58.
-   Shahbaz, M., Tiwari, A. & Sherafatian-Jahromi R.(2012), Financial Development and Income Inequality: Is there any Financial Kuznets curve in Iran?, MPRA Paper, No. 40899.
-   Shaw, E. S. (1973), Financial Deepening in Economic Development, New York, Oxford University Press.
-   Sherafat Jahromi, M. N. & Negintaji, Z.(2010), The impact of macroeconomic policies on income distribution in Iran, Jornal of Economics and Modeling, 1 (2) , 4-29, (in Persian).
-   Stiglitz, Joseph E.(1994),The Role of the State in Financial Markets, Proceedings of the World Bank Annual Conference on Development Economics 1993 @ 1994, 19-61.
-   Tariq Majid, M.(2013), Inequality, Financial Development and Government: Evidence from Low-Income Developing Countries, MPRA Paper, No. 50296.
United Nations, New York(2010), Rethinking Poverty; Report on the World Social Situation 2010, Department of Economic and Social Affairs, ST/ESA/324, p. 19.