Research On The Impact Of Income Gap On Economic Growth Factors Under Imperfect Financial Market

Since the reform and opening up,Chinas economy has developed rapidly,and peoples living standards have gradually improved.At the same time,the income gap among residents has also widened.In addition to the widening of the overall income gap,China also faces large regional and urban-rural income gaps.After the financial crisis in 2008,many people began to reflect on the economic development structure at that time,pointing out that the problem of global income imbalance was an important reason for the outbreak of the financial crisis。However,long before the financial crisis,the impact of income gap on economic growth had been extensively studied.However,due to the different data and measurement methods adopted by researchers,the conclusions drawn are not completely consistent.Combining with the reality of Chinas imperfect financial market,this paper studies the impact of income gap on Chinas economic growth under the imperfect financial market.Economic operation needs the support of the financial system.A developed financial system can provide timely and adequate financial services for the real economy and improve the efficiency of capital utilization.However,financial markets are generally imperfect,there exists financial frictions such as moral hazard and adverse selection caused by information asymmetry.Taking the lending behavior in the financial market as an example,under the imperfect financial market,due to the information asymmetry between borrowers and lenders,lenders cannot observe the borrowers behavior accurately,the borrower s will have the motivation to be lazy and abscond with the money.Faced with Moral hazard,the lenders will require that the borrowers should have sufficient self-owned funds as collateral.The higher the individuals income,the lower the moral hazard that may arise,and thus the easier it is to obtain financial support.People with lower income are often excluded from financial services and cannot borrow enough funds to carry out optimal economic activities.So,under the imperfect financial market,the economic activities that individuals can carry out are related to their income levels.From the perspective of regional aggregates,when income gap change,the aggregated economic activities in the region will also change.Therefore,under the imperfect financial market,the income gap will have impacts on the economic growth.The final result of economic growth is reflected in the output.From the production equation,we know that the total output depends on three production factors— —the physical capital,human capital and technological progress.Focused on three production factors,this paper studies the impact of income gap on physical capital investment,human capital investment,and enterprise R&D innovation under imperfect financial markets.From the study in this paper,people can get some enlightenment for the relationship between income disparity and economic growth.In the research on the impact of income gap on physical capital investment,based on the analysis of theoretical model,this paper find that different groups show different degrees of income gap which have different effect on physical capital investment.It is possible to get inconsistent result between income gap and investment when using the income gap of overall country.By building an investment-decision model under information asymmetry,this paper distinguishes two groups with low income and high income,and studies how the three income gap variables which are the income gap of each group and the population percentage of low-income group influence the equilibrium investment through financial market imperfection,saving and consumption,and what is the direct effect and indirect spatial effect.Then in the empiric analysis,with the panel data of 25 provinces and year 2010,2012,2014 and2016,this paper uses 1 to 9 times poverty standard income to distinguish the high-and low-income groups,and calculate the three income gap variables,then estimate the direct effect and indirect effect of income gap on investment in spatial regression.The result shows that under the regressions of different times poverty standard income,lowincome families’ income inequality has no significant effect on investment;the direct effects,indirect effects and the total effects of high-income families’ income inequality on investment are all negative;the direct effects of low-income families’ population percentage on investment are negative,most of the indirect effects are not significant,the total effect is negative but with poor significance.This result is robust under different weighting matrix and different income inequality measurement methods.In the research on the impact of income gap on human capital investment,by constructing the human capital investment model under incomplete financial market,this paper makes the inference that the effect of income gap on residents human capital investment will decrease with the increase of financial development level.The dynamic panel regression with the data of 31 provinces and year 2014-2019 in China shows that the inference is valid when using different measures of related variables and different estimation methods.With the increase of financial development level,the effect of income gap on residents human capital investment decreases gradually.When financial development level is above the threshold value,income gap has negative effect on residents human capital investment.In the sample,87.64% observations’ financial development level have exceeded the threshold value,so there already exists widely negative effect of income gap on residents human capital investment in China.Moreover,this paper also finds that the effect of income gap on residents human capital investment in eastern area is negative,and smaller than other regions.Finally,this paper also conducts a robustness test with a cross-country sample of 95 countries from 1971 to 2019,and finds that the conclusion of this paper still holds.The increase of financial development level will improve the fund utilization efficiency and the residents human capital investment.With the increase of financial development level,the income gap is expected to have a continuous negative impact on residents human capital investment.Therefore,improving the financial development level and narrowing the income gap are feasible ways to promote residents human capital investment and accumulation.In the research on the impact of income gap on enterprise innovation,this paper distinguishes rich and poor group of people in a general equilibrium model,and analyzes the impact of income gap on enterprise innovation through human capital investment and consumer demand structure under imperfect financial market.This paper assumes that there exists a minimum investment volume in human capital investment.After completing human capital investment,an individual can become a skilled labor and can participate in the production and R&D activities of innovative products.Otherwise,individual will become an unskilled labor and can only participate in the production of traditional products.The rich have a higher income and can invest in human capital,thus will become skilled labor;while the poor are restricted by borrowing constraints and cannot meet the minimum human capital investment requirement,thus will become unskilled labor.The degree of borrowing constraints in the financial market will affect the proportion of the two types of people and then affect the supply of skilled labor.The skilled labor is important factor in enterprise R&D activities,so the enterprise innovation will be affected too.In addition,different consumer groups have different consumption demands for innovative products.The rich have higher incomes and thus have greater willingness to pay for innovative products.The income gap between the two types of people will influence the aggregate consumer demand for innovative products,thus affect the monopoly profit of innovative products,and further affect the incentives for companies to conduct innovative R&D activities.After the analysis of the model,we get the conclusion that the economy will converge to a stable equilibrium state when the economic parameters satisfy certain constraints and the enterprise adopts the "separate pricing" strategy.Under the "separate pricing" strategy,the rich consume innovative products,while the poor consume inferior products.The consumption structure in steady state is stratified.This paper conducts a comparative static analysis of the steady state under different parameter values,and finds that the proportion of rich,the weight of consumption in the utility function,the risk-free interest rate,the production efficiency of innovative products and the R&D efficiency will all affect the income Gini coefficient and utility growth rate in steady-state.The increase in the proportion of rich can simultaneously reduce the income Gini coefficient and increase the utility of consumers,thereby achieving a balanced development of efficiency and equity.But at the same time,the net capital inflow to the economy and the leverage ratio of financial institutions are also increasing.When taking the risk of international capital flow and the risk of domestic credit default into consideration,the overall risk of the financial system will increase.To avoid financial risk,financial institutions will tighten credit constraints,thereby reducing the proportion of people who can invest in human capital.In this case,both the income Gini coefficient and the utility growth rate in the steady state will decrease.The economy will fall into a state of suboptimal development.Therefore,by strengthening the construction of the financial market,improving the transparency of the financial market,and reducing the financial frictions such as moral hazard and adverse selection caused by information asymmetry in the financial market,people can achieve efficiency and equity simultaneously.The income gap will be smaller and the utility growth rate will be higher.The economy will be more harmonious.To sum up,this paper studies the impact of income gap on economic growth factors which are physical capital investment,human capital investment and enterprise innovation under imperfect financial market.The research in this paper will help to deepen people’s understanding of the relationship among financial markets,income gap,and economic growth.Based on the findings of this paper,people can take some measures to reduce income gap and promote economic growth.Specifically,first,because the income gaps of different groups have different effects on physical capital investment,it is necessary to pay attention to the changes of income gap within different groups in addition to the attention on total income gap.Reducing the income gap within the high-income group can effectively promote the total investment;while for the low-income group,reducing the population proportion of this group is a more effective way to promote investment than reducing the income gap within the group.Second,the increase in the degree of financial development can improve the efficiency of capital utilization,which is beneficial for economy.But with the development of financial market,the income gap is expected to have negative impact on human capital investment.Therefore,in addition to improving the development of financial market,it is necessary to reduce income gaps so as to improve human capital investment.Third,the increase of the proportion of skilled labor in the economy can increase the growth rate of consumer utility while reducing steady-state income gaps,thereby promoting synergistic development of efficiency and equity.Some methods such as raising national income,increasing public education expenditure,and lowering the threshold for human capital investment are feasible.In addition,people can improve the income distribution structure to increase the proportion of middle-income groups,thus more people can invest in human capital and become a skilled labor force.In addition,since the imperfect financial market will make the economy reach a sub-optimal steady state in which the income gap widens and the utility growth rate decreases,people can strengthen the financial market construction and reduce financial friction with the support of financial technologies such as big data and cloud computing.In this way,the economy can achieve the optimal steady state,in which the economy can achieve efficient and equality simultaneously.