Reinvestigating the Reciprocal Relationship between Democracy and Income Inequality

Abstract

Few social science relationships have spawned as much interest -- or as many elaborate theoretical models and arguments -- as that between democracy and income inequality. However, the empirical literature has generally employed statistical models based on problematic assumptions, and has produced quite mixed results. Hence, this paper makes an important empirical contribution by applying models that, for instance, account for endogeneity biases and control for country--specific effects. Despite being correlated, there is very little evidence of any effect of income inequality on level of democracy once employing appropriate model specifications. Furthermore, there is no robust evidence that inequality systematically affects either democratization prospects or democratic stability. In contrast, there is evidence that democracy reduces income inequality when inequality is proxied by share of income going to wages. However, also this effect is sensitive to the choice of inequality measure. Democracy does, for instance, not reduce inequalities in disposable household incomes.

Do gender empowerment and democracy reduce poverty rate? A cross-provinces evidence from western Indonesia

“…In turn, income inequality encourages an increase in poverty rates (Aguilar, 2016). On the contrary, this finding contrasts with the results of Knutsen's (2015) study, which concluded that democracy reduces poverty and improves income distribution. This finding is also not in line with the results of Barro's (1997) study, which provided empirical evidence that democracy has an inline direction with people's welfare.…”

“…The results of previous studies on the relations between democracy and poverty rate still had been an open question. Democracy reduces poverty and improves income distribution (Knutsen, 2015). In contrast to Knutsen, the finding of Qureshi & Ahmed's (2012) study found that there is a positive relationship between democracy and poverty rate.…”

Democratic Institutions, Natural Resources, and Income Inequality

“…However, the existing evidence of the link between democracy and income inequality writ large is rather inconclusive, with little direct links between the institutions of democracy and lower inequality (see especially Balcazar (2016) in Latin America and Timmons 2010and Knutsen (2015) for a global look). In some sense, this is related to the distribution of the factors of production pre-democratization, as highly unequal societies before democracy are likely to take a long time to become more equal.…”

Democratization and the Conditional Dynamics of Income Distribution

“…The literature review found there convincingly argues that there is no empirical consensus concerning the effect of democracy on inequality levels. Using fixed-effects panel regression techniques, Acemoglu et al (2015) find mainly null results in tests of the unconditional correlation between democracy and income inequality, which are confirmed by Gründler and Krieger (2016) and Knutsen (2015).…”