This study explores the relationship between income inequality and household indebtedness using panel data on 17 OECD-countries over the time period 1995-2015. Motivated by relative income theory of consumption and previous empirical research we anticipate a non-monotonic relationship between changes in household debt and income inequality (measured by the Gini- coefficient), as dynamics between different groups of households in the income spread is expected to vary at different levels of inequality. Carrying out the empirical analysis we find notable indications of an inverse U-shape relationship between inequality levels and household borrowing. We locate an estimated turning point at a Gini-value of 28.84, which indicates a positive marginal effect on household borrowing as inequality grows from levels below this point, turning negative as inequality increases further. This suggests that as income inequality grows from relatively low levels households increase their rate of borrowing, while at higher levels of inequality households decrease their borrowing rate in response to growing income disparities. Results hold under a random effects model and a pooled OLS model, but fail to prove significant in the stricter fixed effects model, why we cannot draw any definitive conclusions about the magnitude of the effect. Nevertheless, the findings of further complimentary estimations lend credence to our hypothesis. Benefits and limitations of our data and empirical methods are comprehensively discussed, as well as the theoretical mechanisms explaining the relationship. Indicative but in the end inconclusive results leaves ample opportunity for further investigations with more advanced empirical methods. / <p>This bachelor thesis was awarded the highest grade, VG.</p>

An interdisciplinary approach to policy and governance recognizes that many social welfare problems are interrelated, and policy-makers have long recognized a need to address the root causes of these problems. There is much evidence that income inequality is one of these root causes but research suggesting the effect of income inequality is mediated by social capital has complicated the relationship, as have theories of causality that take different approaches. This study takes an ecological approach to these issues to test the relationship between income inequality, social capital and selected adverse outcomes proposed by the relative income hypothesis. The relative income hypothesis posits that the impact of income inequality on adverse outcomes is mediated by social capital. The study used a retrospective cross-sectional design to analyze county-level data for the year 2000 with a structural equation model composed of three constructs: income inequality, modeled by four common measures; a social capital construct based on a model developed by Rupasingha, Goetz and Freshwater (2006); and an adverse outcomes construct designed as a parsimonious measure of social outcomes in four public affairs disciplinary areas. The test of the path presumed by the relative income hypothesis revealed both a direct effect of income inequality and indirect effect of inequality through social capital. However, the direct effect of income inequality on outcomes was significantly larger than the indirect effect, indicating the relationship is moderated, rather than mediated, by social capital. Since the impact of social capital on the selected adverse outcomes was relatively small, and the final model failed to achieve statistical significance, the relative income hypothesis that income inequality exerts its primary effect on outcomes through social capital was rejected.