Innovation, financial permeation, and income inequality: From a dynamic perspective in China

Abstract

Innovation is a driving force of wealth distribution. To explore its time-varying effect on income inequality, we propose a nonparametric model using the local linear dummy variable estimation (LLDVE) method. Based on province-level panel data from China spanning from 2006 to 2020, we find that innovation initially reduces income disparity until 2009, then exacerbates it from 2013 to 2016, and alleviates inequality again over 2018–2020. We further verify that financial permeation serves as a catalyst in the inequitable income distribution driven by innovation. However, this moderating effect reverses the relationship between green innovation and income inequality. This suggests that we should enhance the financial service towards all aspects of innovation beyond its support of green innovation.

Keywords

• Income inequality
• Innovation
• Financial permeation
• Time-varying relationship
• Local linear dummy variable estimation (LLDVE)