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Does democracy reduce income inequality?

Muhammed N. Islam ()
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Muhammed N. Islam: Concordia University

Empirical Economics, 2016, vol. 51, issue 4, No 1, 1299-1318

Abstract: 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.

Keywords: Political freedom; Income inequality; Panel data; GMM estimation (search for similar items in EconPapers)
JEL-codes: C14 D7 H5 O40 (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1007/s00181-015-1047-3

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