The Kuznets curve: determinants of its shape and the role of finance

This paper aims to study the importance of initial resource endowments, the savings rate, and financing opportunities for growth and the distribution of income.

The analysis is based on a theoretical model of accumulation and applies simulations. The frame of presentation is the so‐called Kuznets curve.

The paper shows under what circumstances the inverted U‐shaped curve hypothesized by Kuznets emerges and clarifies the role of a functioning capital market for economic growth and the distribution of income. It turns out that when initial income disparities are high and the savings rate is low it cannot be taken for granted that economic growth leads to a more equal income distribution. The paper further shows that with an efficient capital market total income rises faster and further and inequality is always lower than without a functioning capital market.

Future research should help to identify the institutional and regulatory frameworks that promote a stable basic financial infrastructure.

By drawing on the concept of a hydraulic society the interplay of key factors that drive economic growth and income inequality can be clarified.