The Impact of Financial Innovation on Well‐Being: The Role of State Capacity in Selected African Countries

ABSTRACT The present study complements the extant literature by assessing the impact of financial innovation on well‐being, contingent on the role of state capacity in Africa. Two dimensions of well‐being are employed: objective well‐being and subjective well‐being. The study uses a sample of 28 African countries during the period 2004–2020. The empirical evidence is based on the Lewbel method, which, unlike other methods based on instrumental variables, creates instruments by exploiting variations in the moments of the endogenous explanatory variable. The main finding is that financial innovation increases well‐being, whereas state capacity dampens the underlying positive effect. The findings are broadly robust to, inter alia, IV/GMM, limited information maximum likelihood (LIML) (i.e., which combines OLS and 2SLS), Driscoll–Kraay and quantile regressions methods. The findings are also robust to the use of sub‐indices of state capacity. The findings are contingent on income levels and regions: (i) Both financial innovation and state capacity are ineffective (effective) in Northern Africa and Southern Africa (Central and Western Africa), whereas (ii) only financial innovation is effective in lower middle‐income, East Africa, low‐income countries and upper middle‐income countries. Policy implications are discussed.

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