Abstract: What are the effects of local credit institutions on the distribution of income? Why should local banking development matter for the level of inequality? We focus on how different dimensions of banking development and other characteristics of 103 provinces in Italy affect the level of inequality.
Using panel estimation and data over the period 2006-2010, we find that local banking development has a significant negative effect on the Gini coefficient and other measures of inequality, i.e. higher banking development is associated with lower inequality. When considering Italian macro-areas subsamples (North, Center, South), the result is robust only for the North; thus suggesting the existence of potential non-linearities in the functioning of the nance-inequality nexus, depending on the level of development. We find that the coefficient on banking development becomes negative and significant after reaching a certain level of the median per capita GDP and after the financial sector has achieved a reasonably high level of development. We, finally, explore other dimensions that might lead to a non linear relationship between nance and inequality by considering the level of unemployment, the level of education and an index of financial dependence of the industrial sector.