Discussion Paper

No. 2012-22 | April 12, 2012
Equity Market Liberalization, Credit Constraints and Income Inequality


This paper provides compelling evidence that equity market liberalization, the most efficient way to smooth financial market frictions such as credit constraints, can alleviate persistent cross-dynastic income inequality through increasing the accumulation of human capital. We examine the impact of equity market liberalization on inequality by using the data of 72 countries during 1980–2006. The effect is robust to alternative measurements of equity market liberalization. Furthermore, equity market liberalization is associated with the different effects of credit constraints on the persistence of cross-dynastic income inequality. Finally, it is proved that foreign equity flows benefit the initially less active stock markets more than the active ones, which is important evidence that foreign equity flows act as a substitute for the domestic financial market. This finding emphasizes the importance of equity market liberalization for the poor, which helps to reduce inequality.

JEL Classification:

F36, F41, G0, O11, O15, O16


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Cite As

Puyang Sun, Somnath Sen, and Shujing Jin (2012). Equity Market Liberalization, Credit Constraints and Income Inequality. Economics Discussion Papers, No 2012-22, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2012-22

Comments and Questions

Anonymous - Referee Report 1
April 13, 2012 - 08:39

See attached file

puyang sun - reply to referee
April 25, 2012 - 15:13

Comments on Referee’s Report :

1. Introduction is too chatty: We have re-written the Introduction and made major editorial changes to the whole paper. We have formalised the arguments and removed the descriptive or chatty concepts.

2. Organization: We have changed the section headings. The sentences referred to by the ...[more]

... referee have been removed and more details of what we really mean have been inserted.

3. We have explained in some detail why under financial repression, private credit availability is (inversely) related to credit constraints. We have explained, following Levine, that private credit as a ratio of GDP defines the relevant independent variable.

4. We have described Figure 1 and the vertical axes.

5. The specification results, including the Sargan test, are now clearly stated.

Anonymous - Referee Report 2
October 05, 2012 - 14:37

See attached file

Puyang Sun - Reply to Referee Report 2
October 25, 2012 - 10:37

Thanks for the referee reports while may I present my schedule for the correction of the paper? I will follow these steps to revise my paper and to resubmit to you.

1. Rewritten the parts which are difficult to read, such as page 15, 2nd line from the top, ...[more]

... page 16, 2nd line from the top and so on.
2. Exam all the coefficients and explain some of them clearly.
3. Skip some tables that are not necessary.
4. Correct all the spelling mistakes.
5. Explain some estimation results in tables clearly and add the explanation in the paper.
6. Discuss the variables in table 4, table 5 and so on, according to the referee report.
7. Read and exam the whole paper to avoid the mistakes of writing.