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Reestablishing the income-democracy nexus

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  • Jess Benhabib
  • Alejandro Corvalan
  • Mark M. Spiegel

Abstract

A number of recent empirical studies have cast doubt on the "modernization theory" of democratization, which posits that increases in income are conducive to increases in democracy levels. This doubt stems mainly from the fact that while a strong positive correlation exists between income and democracy levels, the relationship disappears when one controls for country fixed effects. This raises the possibility that the correlation in the data reflects a third causal characteristic, such as institutional quality. In this paper, we reexamine the robustness of the income-democracy relationship. We extend the research on this topic in two dimensions: first, we make use of newer income data, which allows for the construction of larger samples with more within-country observations. Second, we concentrate on panel estimation methods that explicitly allow for the fact that the primary measures of democracy are censored with substantial mass at the boundaries, or binary censored variables. Our results show that when one uses both the new income data available and a properly non linear estimator, a statistically significant positive income-democracy relationship is robust to the inclusion of country fixed effects.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2011-09.

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Date of creation: 2011
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Handle: RePEc:fip:fedfwp:2011-09

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Keywords: Income;

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  1. Daron Acemoglu & Simon Johnson & James A. Robinson & Pierre Yared, 2005. "From Education to Democracy?," American Economic Review, American Economic Association, vol. 95(2), pages 44-49, May.
  2. Acemoglu, Daron & Johnson, Simon & Robinson, James A & Yared, Pierre, 2005. "Income and Democracy," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5273, C.E.P.R. Discussion Papers.
  3. Amparo Castello Climent, 2006. "On the Distribution of Education and Democracy," Working Papers, International Economics Institute, University of Valencia 0602, International Economics Institute, University of Valencia.
  4. Johnson, Simon & Larson, William & Papageorgiou, Chris & Subramanian, Arvind, 2013. "Is newer better? Penn World Table Revisions and their impact on growth estimates," Journal of Monetary Economics, Elsevier, Elsevier, vol. 60(2), pages 255-274.
  5. Decio Coviello & Matteo Bobba, 2006. "Weak instruments and weak identification in estimating the effects of education on democracy," IDB Publications 6698, Inter-American Development Bank.
  6. Ivan Fernandez-Val, 2007. "Fixed Effects Estimation of Structural Parameters and Marginal Effects in Panel Probit Models," Boston University - Department of Economics - Working Papers Series, Boston University - Department of Economics WP2007-009, Boston University - Department of Economics.
  7. Acemoglu, Daron & Johnson, Simon & Robinson, James A. & Yared, Pierre, 2009. "Reevaluating the modernization hypothesis," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(8), pages 1043-1058, November.
  8. Honore, Bo E., 1993. "Orthogonality conditions for Tobit models with fixed effects and lagged dependent variables," Journal of Econometrics, Elsevier, Elsevier, vol. 59(1-2), pages 35-61, September.
  9. José Cheibub & Jennifer Gandhi & James Vreeland, 2010. "Democracy and dictatorship revisited," Public Choice, Springer, Springer, vol. 143(1), pages 67-101, April.
  10. Hahn, Jinyong & Kuersteiner, Guido, 2011. "Bias Reduction For Dynamic Nonlinear Panel Models With Fixed Effects," Econometric Theory, Cambridge University Press, vol. 27(06), pages 1152-1191, December.
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