Publications

It is widely perceived in the literature that democracy reduces income inequality. However, due to the lack of consistent empirical evidence, scholars have increasingly examined the underlying dynamics that affect this relationship. This paper follows the same path and argues that the effect of democracy on income inequality depends on the level of economic freedom of the country. This paper is the first study of the effects of both democracy and economic freedom on income inequality. This paper measures national income inequality from an Estimated Household Income Inequality (EHII) which is an adjusted measure of the Gini coefficient constructed by Galbraith and Kum (2003) under the University of Texas Inequality Project. Economic Freedom is defined by the degree of economic liberty and the ability to freely undertake business activities. In a panel of 83 countries, from 1975 to 1995 on a quiquennial basis, we find a significant and consistent negative effect of democracy on income inequality. When economic freedom is taken into account in our estimations, the effect of democracy on income inequality turns insignificant in countries that have a relatively closed economy but remains negative in countries that have a relatively market oriented economy. Policy implications are discussed.