Income inequality and agglomeration economies: a case of a developing economy

The concentration of population generates spillover effects and one would expect the upsurge of business and economic activities in that particular area which also affects income distribution in the society. This paper is intended to elucidate income inequality in the context of agglomeration economies in a developing economy like Pakistan during 1980-2014. The study period is hallmarked by the major shocks across the world economies including Pakistan. Therefore, the study incorporates structural break both during the pretesting of time series properties and in cointegration tests. The bounds testing for the long-run cointegration reveals that the under investigating variables are cointegrated. We further find that the Kuznets inverted-U hypothesis does not hold in Pakistan. Moreover, the agglomeration economies negatively and linearly affect income inequality. This study suggests that the concentration of business activities in the less agglomerated areas is helpful in reducing income inequality.