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Does democracy reduce income inequality?

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  • Muhammed N. Islam

    (Concordia University)

Abstract

This paper presents a theory of the effects of political freedom on income inequality, with redistribution acting as a channel through which freedom affects inequality. It is tested on data for 83 countries using system GMM, the results showing freedom reduces inequality across countries. If the freedom level in a country 5 years ago were 1 % higher than another, its income inequality would be 1.33 % lower than the other. The results reveal a nonlinear inverted U-shaped relationship between freedom and inequality. The total effect evolves slowly over a long period of almost 25 years after democratisation takes place. A robust finding is that freedom reduces inequality only in democracies, not in others. Economic development, culture, and institutions cause inter-country income differences. Primary education lowers inequality, and secondary education has little effect.

Suggested Citation

  • Muhammed N. Islam, 2016. "Does democracy reduce income inequality?," Empirical Economics, Springer, vol. 51(4), pages 1299-1318, December.
    • Handle: RePEc:spr:empeco:v:51:y:2016:i:4:d:10.1007_s00181-015-1047-3
    DOI: 10.1007/s00181-015-1047-3
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    Cited by:

    1. Mahyudin Ahmad, 2017. "Economic Freedom and Income Inequality: Does Political Regime Matter?," Economies, MDPI, vol. 5(2), pages 1-28, June.
    2. Ahmad, Mahyudin, 2016. "Middle income trap and income inequality: Empirical evidence on the distributional effect of economic liberalization and political regime," MPRA Paper 76437, University Library of Munich, Germany.
    3. Barriola, Illan & Deffains, Bruno & Musy, Olivier, 2023. "Law and inequality: A comparative approach to the distributive implications of legal systems," International Review of Law and Economics, Elsevier, vol. 75(C).
    4. John Nkwoma Inekwe & Yi Jin & Maria Rebecca Valenzuela, 2020. "Income inequality, financial flows and political institution: sub-Saharan African financial network," Empirical Economics, Springer, vol. 58(6), pages 2635-2665, June.
    5. Christopher A. Hartwell & Roman Horvath & Eva Horvathova & Olga Popova, 2019. "Democratic Institutions, Natural Resources, and Income Inequality," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 61(4), pages 531-550, December.
    6. Jeffrey A. EDWARDS & Alfredo ROMERO & Cephas NAANWAAB, 2022. "Income Inequality, The World Values Survey, And The Interaction Of Cultural Dimensions," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 22(2), pages 5-24.
    7. Wong, Mathew Y.H., 2021. "Democracy, hybrid regimes, and inequality: The divergent effects of contestation and inclusiveness," World Development, Elsevier, vol. 146(C).

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    More about this item

    Keywords

    Political freedom; Income inequality; Panel data; GMM estimation;
    All these keywords.

    JEL classification:

    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • D7 - Microeconomics - - Analysis of Collective Decision-Making

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