Income Inequality and Economic Freedom: The 2000s
Abstract
This study examines the relationship between income inequality and economic freedom by using two concepts developed in institutional economics, namely “extractive and inclusive institutions”. We argue that income inequality might be high both in countries with extractive institutions, where the level of economic freedom is low, and in countries with inclusive institutions, where the level of economic freedom is high. We propose a U-shaped relationship between income inequality and economic freedom. We use a panel data set containing 1425 country-year observations from 137 countries for the years from 2000 to 2018 to test our proposition. The results confirm our expectation that the relationship between income inequality and economic freedom is negative at low levels of economic freedom, but positive at high levels of economic freedom.
Metrics
References
Acemoglu, D., & Robinson, J. A. (2012). Why nations fail: The origins of power, prosperity, and poverty. Currency. DOI: https://doi.org/10.1355/ae29-2j
Ahmad, M. (2017). Economic freedom and income inequality: does political regime matter? Economies, 5(2), 18. DOI: https://doi.org/10.3390/economies5020018
Apergis, N., & Cooray, A. (2017). Economic freedom and income inequality: Evidence from a panel of global economies—a linear and a non‐linear long‐run analysis. The Manchester School, 85(1), 88-105. DOI: https://doi.org/10.1111/manc.12137
Ashby, N. J., & Sobel, R. S. (2008). Income inequality and economic freedom in the US states. Public Choice, 134(3), 329-346. DOI: https://doi.org/10.1007/s11127-007-9230-5
Bennett, D.L., & Nikolaev, B. (2017). On the ambiguous economic freedom–inequality relationship. Empirical Economics, 53(2), 717–754. DOI: https://doi.org/10.1007/s00181-016-1131-3
Bennett, D. L., & Vedder, R. K. (2013). A dynamic analysis of economic freedom and income inequality in the 50 US states: Empirical evidence of a parabolic relationship. Journal of Regional Analysis & Policy, 43(1), 42-55. DOI: https://doi.org/10.2139/ssrn.2134650
Berggren, N. (1999). Economic freedom and equality: Friends or foes? Public Choice, 100(3), 203-223. DOI: https://doi.org/10.1023/A:1018343912743
Carter, J. R. (2007). An empirical note on economic freedom and income inequality. Public Choice, 130(1), 163-177. DOI: https://doi.org/10.1007/s11127-006-9078-0
Clark, J. R., & Lawson, R. A. (2008). The impact of economic growth, tax policy and economic freedom on income inequality. The Journal of Private Enterprise, Fall.
De Soysa, I., & Vadlamannati, K. C. (2021). Free market capitalism and societal inequities: assessing the effects of economic freedom on income inequality and the equity of access to opportunity, 1990–2017. International Political Science Review, 01925121211039985. DOI: https://doi.org/10.2139/ssrn.4099054
Gwartney, J., R. Lawson, and J. Hall. (2016) Economic Freedom of the World: 2016 Annual Report. Vancouver, Canada: Fraser Institute.
Mankiw, N. G. (2020), Brief Principles of Macroeconomics, 9th Ed., Cengage Learning
Murphy, R. H. (2015). The Impact of Economic Inequality of Economic Freedom. Cato J., 35, 117. DOI: https://doi.org/10.1111/ecaf.12111
Pérez-Moreno, S., & Angulo-Guerrero, M. J. (2016). Does economic freedom increase income inequality? Evidence from the EU countries. Journal of Economic Policy Reform, 19(4), 327-347. DOI: https://doi.org/10.1080/17487870.2015.1128832
Scully, G. W. (2002). Economic freedom, government policy and the trade-off between equity and economic growth. Public Choice, 113(1), 77-96. DOI: https://doi.org/10.1023/A:1020308831424
Solt, F. (2020). Measuring income inequality across countries and over time: The standardized world income inequality database. Social Science Quarterly, 101(3), 1183-1199. DOI: https://doi.org/10.1111/ssqu.12795
Tag, M. N. (2021). Judicial institutions of property rights protection and foreign direct investment inflows. International Review of Law and Economics, 65, 105975. DOI: https://doi.org/10.1016/j.irle.2020.105975
