Abstract
It is commonly asserted that economic liberalization increases income inequality in advanced industrial societies. However, the empirical evidence is inconclusive. The current investigation thus attempts to shed light on this important topic by presenting the argument that economic liberalization indirectly augments income inequality given its tendency to expand financial activity. This contention is tested using a panel dataset of 20 developed economies for the years 1988 to 2009. According to the fixed effects two‐stage least squares models, economic liberalization is positively associated with financialization, while financial activity is positively connected to income inequality. These results are found to be consistent across a variety of regression parameters and robustness checks.