Profit sharing, income inequality and capital accumulation

The relationship between economic development and income inequality isn’t neutral vis-à-vis the role of the financial system in responding to the needs of different categories of agents. Indeed, as shown by the literature on the persistent inequality (e.g. Banarjee and Newman, 1993; Piketty, 1997), taking account of the asymmetric impact of the financial imperfections on wealthy and poor agents changes the pace of the Kuznets (1955) relationship between economic development and income inequality.

This paper tries to analyse the effect of introducing profit-sharing financial contracts between banks and entrepreneurs on the evolution of the capital accumulation/income inequality relationship. It is interestingly shown that income inequality disappears when the economy reaches a second stage of development.

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Profit sharing, income inequality and capital accumulation