The Matthew effect and modern finance: on the nexus between wealth inequality, financial development and financial technology

Focus

In the social sciences, the idea of the well endowed receiving further privilege, eg the rich getting richer, is often called the "Matthew effect" (New Testament Book of Matthew, 25:29). In economics, this effect is relevant particularly for wealth inequality. The effect could be amplified by financial development and technological advances that give investors access to better financial services or to assets with higher returns.

Contribution

We test for the Matthew effect with micro data from the Italian Survey on Household Income and Wealth (SHIW) conducted by the Bank of Italy over the period 1991-2016. To assess whether financial development and financial technology increase wealth inequality, we analyse households' wealth and financial returns against indicators of financial development of the territory where the family resides (number of bank branches) and households' use of remote banking, as one form of financial technology (fintech) adoption. This provides further empirical evidence for higher returns by the wealthy, sheds light on the impact of financial development and fintech, and identifies a channel through which technology may contribute to greater wealth inequality if not sufficiently diffused among the population.

Findings

We find that households' financial wealth and financial returns are higher when there is greater financial development and fintech adoption. While households of all wealth deciles benefit from the effects of financial development and financial technology, these effects increase when moving towards the top of the wealth distribution. Still, the economic significance of this gap fell after 2004, as remote banking started to be more diffused among the population and the number of bank branches declined.

Abstract

This paper analyses the role of financial development and financial technology in driving inequality in (returns to) wealth. Using micro data from the Survey on Household Income and Wealth (SHIW) conducted by the Bank of Italy for the period 1991-2016, we find evidence of the "Matthew effect" - a capacity of wealthy households to achieve higher returns than other households. With an instrumental variable approach, we find that financial development (number of bank branches) and financial technology (use of remote banking) both have a positive association with households' financial wealth and financial returns. While households of all wealth deciles benefit from the effects of financial development and financial technology, these benefits are larger when moving towards the top of the wealth distribution. Still, the economic significance of this gap fell in the last part of the sample period, as remote banking became more widespread.

JEL classification: G10, G21, O15, D63

Keywords: inequality, financial development, banks, financial technology, fintech