The inequality debate: do financial markets matter?

This paper investigates whether economic divergence and wealth inequality could be an outcome of asset price bubbles in financial markets. When returns from financial markets outweigh real returns, shareholders could earn significantly more than workers, causing income inequality. Simulations show that economies with a return on capital higher than the marginal productivity of capital will have a higher steady state and experience greater growth. Using the S&P500 stock market returns data from 1880 to 2010, we show that with high growth and rising financial returns, the wealth inequality between shareholders and workers increases but may decrease during a financial crisis.