Turn the Bull Loose: A Test of the Moderating Effect of Economic Liberalization on the Link Between Financialization and Income Inequality in Developed Economies*

Abstract

Objective: A burgeoning field of research shows that financialization is positively associated with income inequality. However, while it is widely recognized that the recent growth of financial activity increases in tandem with the reduction of state controls in national economies, scholars often struggle to find a straightforward connection between economic liberalization and income inequality. In light of this confusion, this study presents the argument that liberalization does not share a direct connection to the distribution of national income. Rather, economic liberalization is a moderating variable that conditions the connection between financialization and income inequality. Methods: These contentions are tested by way of interaction effects using a panel data set of 14 developed economies for the years 1995–2010. Results: The results confirm the main arguments of this study as the positive link between financialization and the income share of the top 1 percent is higher at increasing levels of financial liberalization. Conclusions: This research indicates that cross-national variations of income inequality are partially attributable to state policy decisions on financial activity.