Banking Development, Socioeconomic Structure and Income Inequality

Using rich, unique data from the Italian local credit markets (provinces), this paper inves-tigates the impact of local banking development on income inequality and the role of thesocioeconomic structure in this link. Exploiting the Italian historical banking regulation toinstrument for the local presence of bank branches, we find that local banking develop-ment mitigates income inequality. However, the finance-inequality nexus manifests itselfonly in relatively advanced areas. When we study the structural channels of influence, weuncover evidence that banking development can reduce inequality by affecting geographical mobility and urbanization, while it has modest effects through the development ofmaterial infrastructures and human capital.