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Podcast and Paper: Roxana Mihet on Financial Innovation and Rising Inequality
IMF Podcast | Jan 21, 2021
W
ith the great strides in financial technology in recent years, the lower data processing costs and fees associated with investing in the stock market should have led to broader increases of household wealth. But in this podcast, economist Roxana Mihet says while fintech has reduced barriers to access and held out the promise of gains for all, it may have worsened capital income inequality.
Mihet is Assistant Professor of Finance at HEC Lausanne, and her recent study suggests the most likely beneficiaries of financial innovation are those who have access to the valuable data that inform good investments. Mihet was recipient of the ECB's Young Economists Award in 2020 for her work on Financial Innovation and the Inequality Gap. She was invited by the IMF's Strategy, Policy and Review Department to present her research. Transcript
Roxana Mihet is an Assistant Professor of Finance at the Faculty of Business and Economics of the University of Lausanne, and a faculty member at the Swiss Finance Institute.
Overview of Research Paper
Information-based models of capital income inequality that link return heterogeneity to investor sophistication levels need to assume an increase in data costs to generate an increase in inequality.
Empirically, this assumption contradicts the fact that investment markets have become more informative over time, and theoretically, it also overlooks the possibility poorer investors can avoid paying a large fixed cost for data, simply by buying shares in a fund.
See:
Digital Financial Inclusion in the Times of COVID-19
Davos 2020: Financial inclusion and fintech is key to meeting the UN SDGs
Fintech is Driving Financial Inclusion
Fintech As a Pathway to Financial Inclusion? The Case of China
In this paper, I study the impact of financial innovation on capital income inequality in a theoretical framework where investors, heterogeneous in their sophistication, have a costly choice between not investing, investing through a fund of average quality, and searching for an informed fund.
The model predicts that while financial innovation can make the investment sector more efficient and boost financial inclusion, some financial innovation also brings risks. For example, when the cost of financial data processing falls, more wealthier investors trade on information.
This makes participation less valuable for the marginal stock market participant, who is a relatively poorer investor in some average (uninformed) fund and who exits the market altogether, foregoing the equity premium.
This amplifies the inequality gap and also jointly explains why in the last decades, in spite of a dramatic reduction in data processing costs and fund fees, the US stock market has become more informative, yet the stock market participation rate has been on the decline.
Download the Paper (80 page pDF) Fintech and the Inequality Gap -> here
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