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Identifying the specific channels through which financial development impacts inequality via growth is important both for research and policy prescriptions. Only if the specific channels are identified researchers can study endogenous evolution of finance, growth, and inequality. This knowledge is also important for prescribing sensible policy guidelines that typically have large macroeconomic implications. The existing literature on the subject has not yet attempted this important task. In the present paper, the authors consider three sets of possible channels: human capital development (specifically UNDP Human Development Index (HDI), adult literacy rate, and level and years of schooling); institutional environment (creditor rights); and industrial composition (share of labor-intensive industries in total industrial output, value added and employment).
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