Abstract

The development of the financial system is shown, both historically and in contemporary data, to be adversely affected by inequality in the distribution of land. To accommodate these empirical findings, a theory is developed that highlights the incentives of landowners to oppose competition in the financial sector. These incentives evolve as the economy develops, though, and thus financial development may occur endogenously, depending on the political mechanisms regulating the financial system. The theory shows that the co-incident development of the financial sector and overall economy depend on the initial distribution of agricultural resources.