Democratization and the conditional dynamics of income distribution

Democratization and the conditional
dynamics of income distribution
Michael T. Dorsch∗
Paul Maarek†
July 15, 2016
Abstract
Most theoretical accounts imply that democratization will reduce in-
come inequality as representative governments become accountable to
citizens who would benefit from increased redistribution from the elite.
Yet, available empirical evidence does not support the notion that de-
mocratization, on average, leads to more equal income distributions.
This paper starts from the simple observation that autocracies are quite
heterogeneous and govern extreme distributional outcomes (also egali-
tarian). From extreme initial conditions, democratization may lead in-
come distributions to a “middle ground”. We thus examine the extent
to which initial inequality levels determine the path of distributional dy-
namics following democratization. Using fixed effects and instrumental
variable estimates we demonstrate that egalitarian autocracies become
more unequal following democratization, whereas democratization has
an equalizing effect in highly unequal autocracies.
Keywords: Democracy, inequality, non-linearity, middle-ground
JEL Codes: D30, O15, P48
∗
Corresponding author. Central European University, Nádor u. 9, 1051 Budapest, Hun-
gary; DorschM@ceu.edu; +36 1 327 3000 extension 2751.
†
Université de Cergy-Pontoise, 33 boulevard du Port, 95011 Cergy-Pontoise Cedex,
France; paul.maarek@u-cergy.fr.
1

1 Introduction
This paper reconsiders the effect of democracy on the level of income inequal-
ity in society. We start from the simple observation that autocratic regimes
are highly heterogeneous entities. From monarchistic, to business-friendly mil-
itaristic, to populistic, to communistic, since the second world war, autocratic
regimes have varied dramatically in their ideologies concerning how spoils
should be divided within the economies they govern. Indeed, the differences
are not only ideological, but are reflected in the historical income inequality
data – in our sample, autocratic countries have had Gini coefficients as low as
20 and as high as 75.1
If naturally follows that income inequality dynamics
following transitions from autocracy to democracy may also be quite heteroge-
neous. This simple observation is our starting point, from which we empirically
investigate a non-linearity that has not been examined in the literature. More
precisely, we demonstrate how income inequality dynamics following a switch
to democracy depend on the initial (pre-democracy) level of income inequal-
ity. Intuitively, our results suggest that democracy provides a kind of “middle
ground” – autocratic regimes which governed extreme distributional outcomes
are replaced by political processes that gravitate towards more centrist out-
comes. Importantly, we provide evidence that democratization significantly
affects the degree of income inequality despite the fact that the unconditional
mean effect is null.
The most common narrative in the economics and political science liter-
atures is that democratization should reduce inequality levels. Autocracies
are often elite-dominated societies that have implemented political and eco-
nomic institutions designed to protect the elite’s wealth. Shifting to a demo-
cratic political institution allows for a broader set of economic interests to
be served. In their canonical rational choice model of political transitions,
Acemoglu and Robinson (2001) show how following the political enfranchise-
ment of the poor, the decisive voter (or, decisive political preference) becomes
1
Moreover, we later show that the heterogeneity in terms of income distribution is not
driven by the economic development level. We show that the dispersion of Gini coefficients
among autocratic countries is quite similar within income groups.
2

relatively more poor and, all else equal, should call for inequality-reducing
redistributions, following the classic rational theories of income taxation and
redistribution (Meltzer and Richard 1981; Roberts 1977; Romer 1975). More-
over, the greater the initial degree of inequality before democracy, the greater
should be the decline in inequality following a shift to democracy.2
Yet, the empirical literature concerning the effect of democracy on eco-
nomic inequalities has not reached a consensus supporting this straightfor-
ward empirical prediction. Acemoglu, Naidu, Restrepo, and Robinson (2015)
carefully review this empirical literature, where results vary as widely as the
methods employed and conclude that there is no clear evidence that inequality
decreases following democratization.3
Employing fixed effects dynamic panel
regression models, Acemoglu et al. (2015) go on to show that there is no robust
statistically significant relation between switches to democracy and inequality
levels. Such null results have led researchers to re-consider the extent to which
drivers of democratization are distributive in nature (Aidt and Jensen, 2009;
Bidner et al., 2014; Dorsch and Maarek, 2015; Haggard and Kaufman, 2012;
Knutsen and Wegmann, 2016).
However, the Acemoglu et al. (2015) study does not fully address the fact
that autocracies are heterogeneous, a point made forcefully by Jones and Olken
(2005), who demonstrate that economic performances of autocratic countries
are highly leader-specific (see also De Long and Shleifer 1993 and Reynolds
1985). Just as not all autocracies have histories of sclerotic growth, not all
autocracies feature extreme income inequality. Figure 1 provides histograms
of the net (after tax and transfer) Gini coefficient for autocracies and for
2
See also Ansell and Samuels (2014) and Boix (2003) for alternative narratives from
political science.
3
From case studies on 19th century Europe and 20th century Latin America (Acemoglu
and Robinson, 2001), to cross sectional regressions (Gradstein and Milanovic, 2004; Mulligan
et al., 2004; Perotti, 1996; Sirowy and Inkeles, 1990), to event histories (Aidt and Jensen,
2009), to sophisticated dynamic panel regressions (Acemoglu et al., 2015), the empirical
literature has not established a convincing link between democratization and income in-
equality. For studies that investigate other proxies for inequality and/or redistribution, see
also Rodrik (1999) Lindert (1994, 2004), Scheve and Stasavage (2009). See Lee (2005) for
a study that highlights the importance of state capacity for the ability of new democracies
to redistribute income.
3

Figure 1: The distribution of Net Gini coefficients among autocracies (left) and democra-
cies (right).
democracies. Note that the tails of the distribution among autocracies are
thicker, supporting the notion that autocratic countries govern relatively ex-
treme income distributions. Table 1 provides some statistics concerning the
distribution of net Gini coefficients across different per capita income ranges
for autocratic and democratic countries. Note that the diversity among auto-
cratic countries does not depend on the overall level of economic development.
Autocratic countries are heterogeneous according to their income distribu-
tions for a variety of reasons. Historical differences in settler identities, insti-
tutional foundations, and types of agricultural cultivation shape differential
inequality trajectories across autocracies, where structural inequalities may
have been inherited from the past. Some autocratic countries are competently
managed and have established good institutions that allow for equitable de-
velopment, whereas others have not. Despite not having to stand for elections,
autocratic regimes must cultivate political support from segments of the popu-
lation in order to survive. Whether acting as a representative of the elite or of
the downtrodden, autocratic rulers take ideological stances and redistributive
policies to please their political “coalition” members that vary widely. As a re-
sult, also for political reasons, autocratic countries are heterogenous according
to income distributions.
We follow the intuition established by Larsson-Seim and Parente (2013),
who describe democracy as a middle ground on which formerly autocratic
4

Table 1: Distribution of Gini coefficients by political institutions
Non-democracies Democracies
Income range 10th p. Gini 90th p. Gini Income range 10th p. Gini 90th p. Gini
0 - 25th p. income p.c. min – 1067.55 30.30 59.03 min – 4365.62 33.13 54.02
25th - 50th p. income p.c. 1067.55 – 2046.39 33.45 54.35 4365.62 – 10321.44 32.55 54.85
50th - 75th p. income p.c. 2046.39 – 4890.67 31.07 51.38 10321.44 – 21952.59 24.13 37.83
75th - 100th p. income p.c. 4890.671 – max 30.47 50.55 21952.59 – max 22.90 34.01
countries converge in terms of institutions and economic performances. We
apply this intuition to modeling the dynamics of income inequality following
a democratic switch. Extreme distributional outcomes that were politically
sustainable under autocracy are unlikely to last once a switch to democracy
occurs. Highly unequal autocracies are likely to see inequality reduced af-
ter democratization, when political institutions become more inclusive to the
poorer segment of the population, which should pressure for more redistribu-
tion and pro-poor policies. On the contrary, highly equal autocracies are not
likely to see inequality decrease after democratization since inequality was not
a concern in those countries. In autocratic regimes that rely on a poor segment
of the population for political support, unwinding a legacy of populist policies
upon democratic liberalization creates opportunities for wealth creation that
increase inequality levels.
Our basic point is that without taking into account how the effect is con-
ditional on initial (pre-democracy) income inequality levels, the contrasting
experiences of switches to democracy in high and low inequality autocratic
countries will cancel each other out, yielding the familiar null result, as in
Acemoglu et al. (2015), for example.
We follow an empirical strategy that is broadly similar to Acemoglu et al.
(2015): we employ fixed effects dynamic panel regression models to estimate
the effect of switches to democracy as measured by an indicator that is con-
structed from three leading quantitative measures of democracy (following the
example of Papaioannou and Siourounis 2008a). Our contribution beyond
their study is two-fold. First, using the simple observation that autocratic
countries are quite heterogeneous, we demonstrate that the impact of demo-
cratic switches conditional on initial levels of inequality is a robustly statisti-
5

cally significant determinant of income inequality dynamics.4
We demonstrate
that, on average, relatively egalitarian autocracies become more unequal fol-
lowing democratization, whereas democratization has an equalizing effect in
the relatively unequal autocracies. Our finding that the effect of democracy
on inequality is conditional on initial inequality levels rationalizes the mixed
results in the literature, where the relationship has typically been estimated
unconditionally. As a result, contrary to prior views, democratization actually
strongly affects the degree of inequalities. Second, we pursue an instrumental
variable strategy for democratic switches that allows a causal interpretation
of the result. Acemoglu, Naidu, Restrepo, and Robinson (2014) calculate,
roughly speaking, the dynamic regional share of countries that are democratic
as an instrument for democracy in their study that estimates how democrati-
zation affects economic growth. We construct a similar “democratic wave” in-
strument for our Two Stage Least Squares [2SLS] analysis. Interacting the re-
gional share democracy instrument with pre-democracy inequality levels gives
us a strong and arguably exogenous set of instruments and we show that the
instrumented conditional effect of a democratic switch is quite similar in mag-
nitude to that from the simple OLS estimations. Ours is the first study to
investigate the effect of democracy on inequality using a valid instrument for
democratic transition. We pursue a wide range of alternative specifications to
demonstrate the robustness of our results. Among those exercises, we present
results from 2SLS estimations that also instrument for initial (pre-democracy)
inequality levels.
We then reflect on the possible mechanisms. Democratic switches occur
for a multitude of reasons. When highly unequal, elite-dominated autocracies
become democratic and political power is shifted to the middle, inequality gets
reduced through redistribution and pro-poor policies (in line with Meltzer and
Richard 1981; Roberts 1977; Romer 1975). However, for formerly communist
or collectivist autocracies, democratization was accompanied by market liber-
4
Similar to the empirical literature on macro-economic convergence, we demonstrate
how the dynamics of inequality following a switch to democracy depends on the initial
(pre-democracy) level of income inequality.
6

alizations and greater economic competition that may have increased inequal-
ities from low initial levels. Autocratic societies are highly heterogeneous and
regression analyses that do not take this into account are ignoring important
non-linearities in the effect of democracy on income inequality.
The paper proceeds as follows. In the next section we describe the variables
of interest and the data used for the analysis. The third section provides the
details of our empirical strategy and results. In the fourth section, we discuss
some mechanisms that may be behind our findings, while the final section
concludes briefly.
2 Data
To investigate the extent to which democratization decreases (or increases)
inequality levels, we gathered data from a variety of sources and constructed
a country-level panel from 1960 – 2010. In the paper, we present results from
estimations on yearly panels. In an online appendix, we present results from
the analogous specifications estimated on five-year panels.
Democratic political institution indicator. We construct a binary
indicator for the political system that follows Papaioannou and Siourounis
(2008a) and later Acemoglu et al. (2015, 2014). We combine the composite
Polity2 index of the Polity IV dataset (Marshall et al., 2010) with the political
freedom and civil liberties indexes of Freedom House (2013).5
Specifically,
we consider a state as democratic when Freedom House codes it as “Free” or
5
The Polity index codes the quality of democratic institutions by observation of, among
other things, the competitiveness of political participation, the openness and competitiveness
of choosing executives, and the constraints on the chief executive. The composite Polity
index ranges from -10 to 10, where -10 represents a fully autocratic political system and
10 represents a fully competitive democratic political institution. The Freedom House data
measures political rights and civil liberties, both measured on a scale of 1 (most free) to
7 (least free). Political rights include free participation in the political process, including
the right to vote for distinct alternatives in political elections, complete for public office,
join parties or other political organizations, and elect representatives who actually have an
impact on policy choices. Civil liberties include freedom of expression and belief, the right to
join associations or organizations, protection under the rule of law, and personal autonomy
from the state.
7

“Partially Free” and the Polity2 index is positive. When one of those two
criteria is not satisfied, the state is considered as autocratic. When one of the
two criteria is satisfied but the other one is missing, we verify if the country
is also coded as democratic by the binary indicator developed by Cheibub
et al. (2010).6
Combining these three leading indicators allows us to address
the issue of measurement error that the democracy indices may suffer from
individually. The democracy indicator [D(0, 1)i,t] takes value zero if country i
is determined to be autocratic in period t and it takes value one if country i is
determined to be democratic in period t.7
Our results are robust to different
thresholds for the indices we use and to more simple criteria for considering a
country as democratic.
Both the political science and the economics literatures point to the possi-
bility that democratization may be endogenously determined in this relation-
ship, however. The multitude of papers that use variation in lagged income
inequality to explain democratic transitions (though without consistent re-
sults), alerts us to the possibility that trends in inequality may be sufficiently
persistent that even future inequality dynamics are influencing contempora-
neous transitions to democracy.8
As such, we also pursue an instrumental
variable strategy that isolates variation in our democracy indicator that is ar-
guably exogenous to the dynamics of national income distributions. We follow
the strategy of Acemoglu et al. (2014) and employ an instrument that relies on
6
See Papaioannou and Siourounis (2008a) for a more detailed description of the method-
ology.
7
Note that we code both permanent and transitory transitions to democracy, and rever-
sals to non-democracy. Nothing indicates that the initial dynamics of inequality should be
different in a democracy that eventually reverses to autocracy and democracy that eventually
consolidates. Our measure of democracy captures a bundle of institutions that characterize
electoral democracies. The indexes we use to construct our democracy variable include free
and competitive elections, checks on executive power, and an inclusive political process that
permits various groups of society to be represented politically. Our measure of democracy
also incorporates the expansion of civil rights through the Freedom House’s index. Acemoglu
et al. (2014) show that these institutional components are quite strongly correlated.
8
See, for example, Acemoglu and Robinson (2001, 2006); Acemoglu et al. (2015); Ansell
and Samuels (2014); Boix (2003); Freeman and Quinn (2012); Gassebner et al. (2013);
Gradstein and Milanovic (2004); Haggard and Kaufman (2012); Houle (2009); Papaioannou
and Siourounis (2008b).
8

the observation that political transitions have historically occurred in regional
“waves”9
by calculating the evolution of the fraction of countries with demo-
cratic institutions in a region among countries that shared the same political
institutions at the beginning of the panel.
Beyond addressing the possible reverse causality bias caused by any simul-
taneous determination, employing an instrument for democratization seems
prudent for the following reasons. First, it allows us to deal with any time-
varying omitted variables for which our baseline fixed-effects dynamic panel
cannot fully control. Second, despite the fact that our democracy indicator is
composed of several indicators, measurement error on marginal country-year
cases remains a serious concern. To the extent that it is a strong first-stage
predictor of democratization events, our instrument based on dynamic regional
share of democracy smooths out the estimated impact of erroneously coded
transitions.
More formally, we construct the following instrument for democratization
events in country i of region r in period t, which we denote by Zr
i,t:
Zr
i,t =
1
Nr
i,0 − 1 j∈r,Dj,0=Di,0,j=i
Dj,t
where Nr
i,0 corresponds to the number of countries in the region of coun-
try i with the same institution as country i at the beginning of the panel
(Dj,0 = Di,0). For a country i we sum the number of countries sharing i’s
initial type of political institution (j = i, j ∈ Nr
i,0) in the region r that are
democratic at time t (Dj,t) excluding country i. The idea is to observe the
evolution of democratic institutions in the countries in the same region as
country i which share the same institution initially. For instance, in a re-
gion in which initially 10 countries were autocratic, when considering one of
them (country i), we look at the evolution of our democracy indicator in the
9
See Huntington (1993) for the classic exposition. In the modern economics literature,
see, for example, Ellis and Fender (2011) and Dorsch and Maarek (2015) for theory and
Aidt and Jensen (2014) or Persson and Tabellini (2009) for evidence. Though democracies
have not been consolidated following the Arab Spring, the successive political transitions
from autocracy also provides credence to the notion.
9

Figure 2: Democratic switches and the regional share instrument.
9 others in order to explain changes in country i. Intuitively, we expect what
happens in the regional countries is not related to the degree of inequality
in the domestic country i, except through its influence on domestic political
institutions.10
When a “wave” of democratization reaches a region that was
initially autocratic, this increases the probability that country i democratizes.
Figure 2 plots the country-specific instrument for six example countries from
three different regions.
We have strong theoretical priors that such an instrument would be highly
relevant and indeed, we later report some first-stage F-statistics well over 100.
Logically, the instrument also seems quite likely to satisfy the exclusion re-
striction as national income distributions should not necessarily be affected by
variation in regional political institutions other than through its effect on do-
mestic political institutions. One limit of our instrument may be the fact that
transitions in neighbor countries may affect growth there, which could affect
growth in country i if the regional economies are somewhat integrated and
affect both inequality and the probability to observe a transition in country i.
10
We classify countries into the following ten regions: (1.) Eastern Europe and post Soviet
Union, (2.) Latin America, (3.) North Africa and Middle East, (4.) Sub-Saharan Africa,
(5.) Western Europe and North America, (6.) East Asia, (7.) South-East Asia, (8.) South
Asia, (9.) The Pacific, and (10.) The Caribbean.
10

Growth may, for instance, affect the probability of democratization through
the opportunity cost channel à la Acemoglu and Robinson (2001). There ex-
ists some empirical evidence for such an effect (see, for instance, Brückner and
Ciccone 2011 or Burke and Leigh 2010). Growth may also affect inequality
through the hypothesized “Kuznets curve” relation (Kuznets, 1955), though
empirical evidence of such a relation is mixed. We thus control for the log of
real GDP per capita in every specification of our paper. For the OLS specifica-
tions, it is a routine and obvious control. For the IV specifications, controlling
for economic growth should help to satisfy the exclusion restrictions due to
the indirect effect of democratization in neighboring countries on economic
growth.
Regional countries may also share some common structural characteristics
that may simultaneously affect political institutions and inequality, but all of
our regressions include country fixed effects to capture those common features.
Once conditioning the effect of the democracy instrument on within-country
lags of inequality and economic growth, as well as period and country fixed
effects, our set of excluded instruments should not have a direct effect on
future period inequality in country i. Indeed, the results presented in the next
section consistently fail to reject the null hypothesis that the set of instruments
excluded from the second stage regressions are exogenous. Though not strictly
accurate, we refer to the instrument for democracy as the “dynamic regional
share of democracies”.
Income inequality. For the inequality data, we use the most standard mea-
sure of income inequality, the Gini coefficient. The Gini coefficient is a normal-
ized measure between 0 and 100, where higher levels indicate a more unequal
income distribution. We employ the Standardized World Inequality Indica-
tors Database [SWIID], introduced by Solt (2009). The SWIID combines the
Luxembourg Income Study with the World Inequality Indicators Database
and standardizes the measurements across the two databases yielding a cross-
national panel that is significantly enlarged from the individual databases.
The Solt database also reports Gini coefficients for both the net income distri-
bution (after taxes and transfers) and the gross income distribution. Through-
11

out, we report results using both the net and the gross Gini coefficients, as
democratization could both affect inequality due to direct redistribution or,
more generally, transformation of institutions that may redistribute economic
power in the population. As inequality levels may be path dependent and
change rather slowly over time, in most specifications we also include lagged
dependent variables to take into account the dynamics of inequality that may
be independent of democratization events.
We are interested in observing how democratization events affect future
inequality levels. We have hypothesized that the level of inequality before de-
mocratization will shape the direction of the relationship. In order to capture
this conditional effect of democracy on inequality, we add an interaction be-
tween our democratization variable and the degree of inequality in the country
prior to democratization. We define a fixed pre-democracy inequality variable
for these interaction terms. Note that the level of inequality in the year of the
democratic switch may not accurately reflect the level of inequality prevailing
in autocracy since, for example, the regime may have made concessions through
redistribution before being forced to democratize. Therefore, whenever pos-
sible, we take as the pre-democracy level of inequality the level of inequality
prevailing five years before democratization occurs. When not available, we
take the closest observation available for inequality to the five year window
(for instance, four years before democratization occurs if the observation five
years before is not available). We label this transition-specific variable as
Ginii. In our robustness checks, we also consider some simpler codings of the
pre-democracy inequality variable for use in the interaction term.
To provide further intuition for the battery of regression results that follow,
we first consider several descriptive figures. We calculate the difference in
the Gini coefficient ten years after a transition from its pre-democracy initial
level. The left-hand side of Figure 3 scatters this difference against the pre-
democracy level for the net Gini coefficients (Gini). The negative relationship
is strongly statistically significant and the R2
is quite high for such a simple
regression. The right-hand side of figure 3 is the analogue for the gross Gini
coefficient, for which the correlation is even stronger. The figures show that 10
12

Figure 3: For the left-hand side, ∆ Net Gini = 13.24∗∗∗
− 0.33∗∗∗
× Gini. R2
= 0.292. For
the right-hand side, ∆ Gross Gini = 19.17∗∗∗
− 0.44∗∗∗
× Gini. R2
= 0.333.
years after a switch to democracy, inequality increases in countries that were
egalitarian autocracies and inequality decreases in countries that were unequal
autocracies.
In the 2SLS estimations that instrument for democratization using the dy-
namic regional share of democracies, we also instrument for the interaction
term by simply interacting the pre-democracy level of inequality (Gini) with
the dynamic regional share of democracies. In some regressions, we also in-
strument the initial degree of inequality using the instrument proposed by
Easterly (2007). He ﬁnds (and we corroborate) that the abundance of land
suitable for growing wheat relative to that suitable for growing sugarcane is
strongly negatively correlated with the pre-democracy level of inequality in
countries that have transitioned from autocracy to democracy over the period
of our sample. The basic idea is that the land endowments suitable for grow-
ing commodities featuring economies of scale and the use of slave labor (sugar
cane, for example) is historically associated with high inequality. In contrast,
commodities grown on family farms (typically wheat) promoted the growth of
a large middle class and lower inequality levels.
Income per capita. Finally, in all regressions we have controlled for the lag
of logged real GDP per capita, as measured by the Penn World Table (Hes-
ton et al., 2012). It is important to control for per capita income levels for
two principle reasons. First, we take Lipset’s Modernization Theory (Lipset,
13

Table 2: Summary for baseline sample
Non-democracies Democracies
Mean Std.Dev. Obs. Mean Std.Dev. Obs.
Gini coefficient, net income 41.23 9.40 1327 37.20 10.48 2525
Gini coefficient, gross income 44.85 10.20 1276 45.39 7.77 2521
Real GDP per capita, chain series 3890.25 5278.98 1327 14031.77 11814.53 2525
Share of region democracy 0.25 0.25 1327 0.73 0.30 2467
Inequality instrument 0.05 0.14 1327 0.12 0.21 2525
1959) and the Kuznetz curve (Kuznets, 1955) seriously, so omitting per capita
income would bias estimates of the effect of democracy, since both the like-
lihood of democracy and the evolution of income inequality may depend on
economic development levels. Second, as mentioned above, controlling for per
capita income makes us more confident that the democracy instrument satis-
fies the exclusion restriction. Summary statistics of all the variables used in
the analysis are presented in Table 2.
3 Panel regression results
This section presents the results of a series of panel regression models that
highlight how the effect of democratization on inequality depends on initial
(pre-democratization) levels of inequality. In our tables of baseline results, we
first present results from regressions where democratization and initial inequal-
ity are not interacted and then present a series of regressions that highlight
how the effect of democratization significantly interacts with initial inequality
levels. The tables then go on to present analogous results using our external
instruments for democratization. First, we present our baseline tables that
use as dependent variable the net Gini coefficient (Table 3) and the gross Gini
coefficient (Table 4). Table 5 presents results that use simplified methods
for calculating the initial (pre-democracy) inequality levels, Table 6 consid-
ers several intuitive alternative samples, while table 7 considers alternative
democracy indicators. Finally, Table 8 provides a series of 2SLS estimations
that also instrument for the initial inequality level in the interaction term. An
14

online appendix present the analogues of Tables 3 – 8 using five year panels
and also provides results using GMM estimators for both the annual and the
five-year panels. Though it is common in the empirical literature on political
institutions to consider five-year panels, we prefer to focus attention on the
annual panels due to the fact that our preferred specifications include lagged
dependent variables and the so-called “Nickel bias” in dynamic panel regres-
sions with fixed effects is less of a concern when there are many time periods
in the panel (Nickel, 1981). All specifications control for the lag of logged per
capita real national income, country fixed effects, and period fixed effects. In
all tables, we report standard errors that have been clustered at the country
level.
3.1 Baseline regression analysis
The first column of Table 3 tests the extent to which democratization can ex-
plain within-country variation in inequality levels. Using ordinary least squares
[OLS], we estimate:
Ginii,t = ρGinii,t−1 + αD(0, 1)i,t−1 + βGDPi,t−1 + γi + δt + ui,t, (1)
where D(0, 1)i,t is the indicator for democracy that was described above, the
γi’s denote a full set of country dummies that capture any time-invariant coun-
try characteristics that affect inequality levels, and the δt’s denote a full set of
period dummies that capture common shocks to inequality levels. The error
term ui,t captures all other factors not correlated with our controls which may
also explain democratic switches, with E(ui,t) = 0 for all i and t. In general,
in our estimations the autoregressive effect is quite strong, suggesting that
democratization takes time in order to produce sizable impacts on inequal-
ity. Thus, it is important that a dynamic estimator is employed. The second
column allows for a stronger auto-regressive component to the estimated in-
equality dynamics by including four lagged dependent variables. The first two
columns of Table 3 demonstrate that the unconditional effect of lagged democ-
ratizations does not explain inequality levels with statistical significance. We
15

also calculate the long-run effect on inequality levels of a switch to democracy
as
ˆα
1 − ΣL
j=1 ˆρt−j
, (2)
where L represents the number of lags on the dependent variable included in
the specification.
The third and fourth columns of Table 3 test the extent to which the
effect of democratization is conditional on initial inequality levels using an
interaction term between the democracy indicator and initial inequality levels.
Formally, we estimate:
Ginii,t = ρGinii,t−1 + α1D(0, 1)i,t−1 + α2D(0, 1)i,t−1 × Ginii
+βGDPi,t−1 + γi + δt + ui,t.
(3)
Allowing for a conditional effect yields statistically significant estimates for the
effect of democratization on inequality levels. For low initial levels of inequality
a switch to democracy increases inequality, whereas for high initial levels of
inequality democratization decreases inequality. When presenting estimation
results that include the interaction term, we also report the p-value from an
F-test of joint significance on the coefficients α1 and α2. Here as well, we
calculate the long-run effect of a switch to democracy on inequality. But, note
that the marginal effect of democratization when we include the interaction
term is given by α1 + α2 × Ginii. For concreteness, we calculate the long-
run effect at the 10th and 90th percentile inequality level (among autocratic
countries, Gini
10
= 27.5 and Gini
90
= 57) as
ˆα1 + ˆα2Gini
pc
1 − ΣL
j=1 ˆρt−j
, (4)
where again L indicates the number of lagged dependent variables we include
in the specification. The regression estimates from column 3 imply that the
long-run impact of a switch to democracy for a country in the 10th percentile
of inequality is for the net Gini coefficient to increase by nearly 4 points. By
contrast, the long-run impact for a country in the 90th percentile of inequality
16

is for the Gini coefficient to decrease by more than 6 points. This simple esti-
mation demonstrates how transitions to democracy, on average, bring extreme
income distributions to some “middle ground”. Furthermore, we have exam-
ined (though do not report) how the effect of democratization is conditional on
the level of economic development (measured by per capita GDP). Including
an interaction term in equation (3) between the democracy indicator and per
capita GDP yields an insignificant coefficient estimate and, importantly, the
effect of democracy conditional on initial inequality remains highly statistically
significant.11
Figure 4 provides a visualization of the conditional marginal effect esti-
mated in column 3. The plotted line shows the marginal effect of a switch
from Di,t−2 = 0 to Di,t−1 = 1 on inequality levels in period t as a function of
pre-democracy inequality levels. The plot is super-imposed over a histogram
of the distribution of net Gini coefficients to provide a sense of the empirical
relevance of the range of initial inequality levels for which the effect of a switch
to democracy is statistically significant.
The next four columns of table 3 present results from a 2SLS procedure. We
consider both the democracy indicator and its interaction term as potentially
endogenous and instrument for both of them. Thus, the first stage equations
we estimate are:
D(0, 1)i,t = ζGinit−1 + η1Zi,t + η2Zi,t × Ginii + θGDPi,t−1
+γi + δt + ei,t
D(0, 1)i,t × Ginii = ζGinit−1 + η1Zi,t + η2Zi,t × Ginii + θGDPi,t−1
+γi + δt + ei,t.
(5)
We use the fitted values from equations (5) in the second stage:
Ginii,t = ρGinii,t−1 + α2S
1 D(0, 1)i,t−1 + α2S
2 D(0, 1)i,t−1 × Ginii
+βGDPi,t−1 + γi + δt + ui,t.
(6)
11
For every specification that does not instrument for democracy, we have verified that
the effect of democracy conditional on initial inequality level is robust to also allowing for
the effect of democracy to be conditional on the economic development level. These results
are available on request.
17

Table3:EffectsofdemocracyonthenetGinicoefficient
OLSTwo-StagedLeastSquares
(1)(2)(3)(4)(5)(6)(7)(8)
democracyt−1-0.0920-0.09021.3525***1.2665***1.9331***1.8223***1.5974***1.5334***
(0.153)(0.112)(0.425)(0.287)(0.572)(0.552)(0.478)(0.458)
democracyt−1×gini-0.0351***-0.0335***-0.0462***-0.0456***-0.0380***-0.0380***
(0.011)(0.007)(0.014)(0.014)(0.010)(0.010)
logGDPpercapitat−10.6800***0.3194*0.5693***0.19970.5682***0.5555***0.21080.2084
(0.182)(0.179)(0.172)(0.187)(0.190)(0.186)(0.210)(0.207)
ginit−10.8905***1.2536***0.8947***1.2547***0.8956***0.8956***1.2570***1.2568***
(0.009)(0.044)(0.009)(0.043)(0.008)(0.008)(0.043)(0.043)
ginit−2-0.1966**-0.1947**-0.1951**-0.1951**
(0.079)(0.078)(0.078)(0.078)
ginit−3-0.2669***-0.2683***-0.2696***-0.2697***
(0.074)(0.074)(0.074)(0.074)
ginit−40.0928***0.0947***0.0944***0.0947***
(0.034)(0.034)(0.034)(0.034)
Country&yearfixedeffectsyesyesyesyesyesyesyesyes
within-R2
0.85350.88510.85500.8865––––
JointF-testp-value––0.00620.00000.00230.00250.00100.0009
Excludedinstruments––––2323
C-DF-statonexcludedinstruments––––214.329156.814174.682126.946
K-PrkF-statonexcludedinstruments––––16.00611.94211.4498.291
HansenJ-testp-value–––––0.6049–0.3865
Weak-instrument-robustp-value––––0.00710.02330.00230.0064
N37883253378832533726370832033203
Countries154143154143147147141141
Numberofdemocracychanges10476104761041037676
Long-runeffectat10thpercentileGini-0.84-0.773.693.036.345.444.864.31
Long-runeffectat90thpercentileGini-0.84-0.77-6.13-5.66-6.73-7.45-5.03-5.57
Years1962–20101965–20101962–20101965–20101961–20101961–20101964–20101964–2010
Notes:Robuststandarderrorsclusteredbycountryareinparentheses.
***Significantatthe1percentlevel.
**Significantatthe5percentlevel.
*Significantatthe10percentlevel.
18

Figure 4: The marginal effect of a democratic transition on net Gini coefficients, condi-
tional on the initial (pre-democracy) level of inequality. The figure is based on regression
estimates from column (3) of Table 3. Dashed lines represent 90% confidence intervals.
Columns 5 and 6 include a single lagged dependent variable, while columns 7
and 8 include four. To save space, we present only the second stage results
(though we report first-stage F-statistics as justification for the strength of
the instruments). Columns 5 and 7 are exactly identified (the number of
excluded instruments is the same as the number of endogenous variables).
The specifications in columns 6 and 8 are over-identified, allowing us to report
the Hanson p-values that test whether the set of excluded instruments can be
considered exogenous. As an extra excluded instrument we also use the second
lag of the share of a country’s region that is democratically governed. In the
next sub-section where we investigate the robustness of the baseline results,
we also instrument for the pre-democracy Gini coefficient in the interaction
term.
To conserve space, we do not report the unconditional effect of a switch to
democracy (as in columns 1 and 2), but note that it is also insignificant when
we use an instrument for democracy. However, conditional on initial levels of
inequality, the effect is highly statistically significant (columns 5 – 8). First-
19

stage F-statistics indicate that the set of instruments is strong (well above
rule of thumb 10). Recalling that the null hypothesis of the Hansen J-test
is that the set of excluded instruments are exogenous, the p-values from the
over-identified regressions (in column 6 and 8) confirm the validity of the set
of instruments along this dimension. We also calculated the implied long-run
impact of a switch to democracy and report similarly that democratization, on
average, brings extreme income distributions towards a “middle ground.” The
estimates from column 5, for example, imply that a switch to democracy for an
autocracy with an initial inequality level at the 10th (90th) percentile leads to
a long-run increase by more than 6 points (decrease by nearly 7 points) of the
Gini coefficient. Such movements correspond to a greater than 50% reduction
in the gap between the 90th and 10th percentile inequality levels for countries
that have switched to democracy.
The 2SLS estimates are quite close to the simple OLS estimates. The 2SLS
estimates imply a larger increase in inequality for perviously egalitarian au-
tocracies (when Gini = 0) that decreases more rapidly as Gini increases. In
other words, for both low and high initial levels of inequality, OLS slightly
underestimates the impact of a switch to democracy. Such an underestimate
would be consistent with endogeneity concerns centered around the notion
that autocrats might adjust their policies to try to prevent a democratiza-
tion – redistribute in elite-dominated autocracies or liberalize some markets
in collectivist autocracies.
3.2 Robustness analysis
This subsection briefly presents the various robustness checks that we have
conducted. The results are generally robust to estimation with the alternative
specifications that we describe below.
Market income inequality. In Table 4, we use the gross Gini coefficient,
rather than the net Gini coefficient, as reported in the previous table. The
coefficient estimates are similar, though the calculated long-run effects have
some interesting differences in the specifications with multiple lagged depen-
20

dent variables. At the 90th percentile Gini, the calculated long-run decrease is
larger for market inequality than for net inequality. On the other hand, at the
10th percentile Gini, the calculated long-run increase is smaller for the market
inequality than for the net inequality. This may indicate that the effect of
democratization occurs through different channels. Evolving market opportu-
nities following democratization, for example, may affect income distributions
beyond the effect of the change in redistributive policies that the literature
typically focuses upon.
Alternative pre-democracy inequality coding. In Table 5, for trans-
parency, we employ simpler constructions of the interaction term. In columns
1 – 4, the pre-democracy inequality variable is simply the level of inequality
during the year of democratization, which we keep fixed for periods following
the democratization. In columns 5 – 8, we simply interact the democracy in-
dicator with the raw Gini data, allowing it to change during the period of the
democratic switch. Results are robust to these simplified coding schemes.
Restricted sample. Table 6 considers several intuitive sub-samples. First,
columns 1 – 3 drop countries that were officially part of the former Soviet
Union. Columns 4 – 6 further drops the Central and Eastern European coun-
tries that were signatories of the Warsaw Pact.12
That the results are generally
quite similar after dropping these groups of countries is encouraging. The non-
linearity is not being driven by a particular group of countries, but the pattern
appears to be more general. Finally, columns 7 – 9 of Table 6 drops countries
that have never been autocratic over the length of the panel.
Alternative democracy indicator coding. In Table 7, we consider several
alternative coding specifications for the democracy indicator. In columns 1 –
4, we continue to utilize the method of Papaioannou and Siourounis (2008a)
and combine three different sources of information concerning the quality of
12
While we do not have data for all of these countries, modern countries that were for-
merly part of the Soviet Union include Russia, Ukraine, Uzbekistan, Kazakhstan, Belarus,
Azerbaijan, Georgia, Tajikistan, Moldova, Kyrgyzstan, Lithaunia, Turkmensitan, Armenia,
Latvia, and Estonia. The original signatories to the Warsaw Treaty Organization were
the Soviet Union, Albania, Poland, Czechoslovakia, Hungary, Bulgaria, Romania, and the
German Democratic Republic.
21

Table4:EffectsofdemocracyonthegrossGinicoefﬁcient
(1)(2)(3)(4)(5)(6)(7)(8)
democracyt−1-0.1413-0.12911.6664***1.5346***2.1408***2.0454***1.4162**1.3418**
(0.167)(0.147)(0.563)(0.461)(0.675)(0.654)(0.590)(0.585)
democracyt−1×gini-0.0402***-0.0379***-0.0391**-0.0401**-0.0315**-0.0326*
(0.013)(0.010)(0.016)(0.016)(0.015)(0.015)
logGDPpercapitat−10.6506***0.29750.5565**0.17000.5657**0.5576**0.19550.1879
(0.238)(0.266)(0.218)(0.256)(0.249)(0.242)(0.275)(0.270)
ginit−10.9084***1.2326***0.9154***1.2392***0.9169***0.9168***1.2390***1.2390***
(0.011)(0.044)(0.010)(0.044)(0.010)(0.010)(0.044)(0.044)
ginit−2-0.1512**-0.1506**-0.1514**-0.1516**
(0.070)(0.070)(0.070)(0.070)
ginit−3-0.3260***-0.3279***-0.3258***-0.3260***
(0.071)(0.071)(0.070)(0.070)
ginit−40.1513***0.1514***0.1500***0.1502***
(0.034)(0.034)(0.034)(0.033)
within-R2
0.86430.89230.86550.8934––––
JointF-testp-value––0.00810.00030.00640.00750.05380.0625
HansenJ-statp-value–––––0.5219–0.4007
N37133173371331733651363531233123
Countries154143154143147147141141
Long-runeffectat10thpercentileGini-1.54-1.383.612.889.848.293.972.71
Years1961–20101961–20101961–20101961–20101961–20101961–20101964–20101964–2010
22

Table5:EffectsofdemocracyonthenetGinicoefﬁcientwithsimpleinteractions
Fixedinitialinequalityinteraction–simpleOncelaggedinitialinequalityinteraction
OLS2SLSOLS2SLS
(1)(2)(3)(4)(5)(6)(7)(8)
democracyt−10.8589*1.0012***1.5858**1.3847**1.7975***0.9346***3.5848***1.1700**
(0.440)(0.348)(0.622)(0.538)(0.458)(0.348)(0.893)(0.581)
democracyt−1×gini-0.0230**-0.0269***-0.0382**-0.0328***
(0.011)(0.008)(0.015)(0.013)
democracyt−1×ginit−1-0.0460***-0.0252***-0.0922***-0.0271*
(0.011)(0.008)(0.022)(0.014)
logGDPpercapitat−10.6187***0.23260.5971***0.23850.5485***0.23810.4307*0.2576
(0.180)(0.191)(0.203)(0.215)(0.198)(0.194)(0.228)(0.219)
ginit−10.8990***1.2642***0.9045***1.2688***0.9127***1.2493***0.9277***1.2515***
(0.010)(0.044)(0.010)(0.044)(0.010)(0.043)(0.012)(0.043)
ginit−2-0.1964**-0.1970**-0.1815**-0.1812**
(0.078)(0.079)(0.078)(0.077)
ginit−3-0.2676***-0.2689***-0.2688***-0.2700***
(0.074)(0.074)(0.074)(0.074)
ginit−40.0931***0.0927***0.0932***0.0927***
(0.034)(0.034)(0.034)(0.034)
JointF-testp-value0.11880.00140.03390.02790.00030.00350.00010.1233
within-R2
0.03980.8858––0.85340.8534––
Excludedinstruments––33––33
C-DF-statonexcludedinstruments––154.946125.194––151.803127.346
K-PrkF-statonexcludedinstruments––12.5588.302––10.8968.567
HansenJ-testp-value––0.63370.3986––0.59830.4094
N37883253370832033602325335453203
Countries154143147141149143145141
Long-runeffectat10thpercentileGini2.232.465.624.616.112.2514.503.96
Years1965–20101965–20101965–20101965–20101970–20101970–20101970–20101970–2010
23

Table6:EffectsofdemocracyonthenetGini,alternativesamples
ExcludingformerUSSRExcludingformerUSSR&WarsawPactExcludingcountriesneverautocratic
OLS2SLSOLS2SLSOLS2SLS
(1)(2)(3)(4)(5)(6)(7)(8)(9)
democracyt−11.3745***1.9469***1.8626***1.2818*1.9428**1.8069**1.7054***2.7210***2.6614***
(0.431)(0.570)(0.555)(0.669)(0.879)(0.842)(0.466)(0.632)(0.612)
democracyt−1×gini-0.0356***-0.0490***-0.0488***-0.0337**-0.0501**-0.0486**-0.0415***-0.0574***-0.0578***
(0.011)(0.014)(0.014)(0.016)(0.019)(0.019)(0.012)(0.015)(0.015)
logGDPpercapitat−10.5178***0.5062***0.4961***0.5026***0.4788***0.4729***0.5620***0.4971**0.4889**
(0.175)(0.186)(0.183)(0.177)(0.185)(0.183)(0.188)(0.220)(0.217)
ginit−10.8963***0.8973***0.8967***0.8954***0.8984***0.8972***0.8880***0.8865***0.8860***
(0.009)(0.009)(0.009)(0.010)(0.010)(0.010)(0.009)(0.009)(0.009)
Country&yearﬁxedeffectsyesyesyesyesyesyesyesyesyes
within-R2
0.8593––0.8553––0.8636––
JointF-testp-valuefrom2ndstage0.00650.00160.00160.07490.03160.03030.00180.00010.0001
Excludedinstruments–23–23–23
C-DF-statonexcludedinstruments–209.787153.323–188.342142.049–73.24254.041
K-PrkF-statonexcludedinstruments–15.61611.562–12.98110.067–7.7035.831
HansenJ-statp-value––0.4377––0.5857––0.4683
Weak-instrument-robustp-value–0.00460.0122–0.05540.1186–0.00180.0053
N356935073493339733353322253025192509
Countries139132132133126126111106106
Long-runeffectat10thpercentileGini3.815.845.043.385.564.585.0410.089.40
Long-runeffectat90thpercentileGini-6.30-8.21-8.90-6.12-8.97-9.37-5.87-4.83-5.56
Years1961–20101961–20101961–20101961–20101961–20101961–20101961–20101961–20101961–2010
24

Table7:EffectsofdemocracyonthenetGinicoefﬁcientwithalternativedemocracyindicators
ANNR–morestringentPolitydemo
OLS2SLSOLS2SLS
(1)(2)(3)(4)(5)(6)(7)(8)
democracyt−10.9437**0.9462***1.8079***1.4900***1.7458***1.3989***2.0043***1.6379***
(0.402)(0.290)(0.580)(0.474)(0.396)(0.268)(0.579)(0.474)
democracyt−1×gini-0.0243**-0.0246***-0.0449***-0.0367***-0.0433***-0.0353***-0.0498***-0.0401***
(0.010)(0.006)(0.014)(0.011)(0.010)(0.006)(0.015)(0.011)
logGDPpercapitat−10.6260***0.25980.5943***0.24430.5545***0.20560.5572***0.2174
(0.177)(0.183)(0.183)(0.196)(0.178)(0.195)(0.196)(0.220)
ginit−10.8932***1.2556***0.8953***1.2584***0.8973***1.2449***0.8978***1.2464***
(0.009)(0.043)(0.009)(0.043)(0.009)(0.043)(0.008)(0.042)
ginit−2-0.1957**-0.1963**-0.1903**-0.1904**
(0.078)(0.079)(0.079)(0.079)
ginit−3-0.2685***-0.2700***-0.2582***-0.2597***
(0.074)(0.074)(0.074)(0.075)
ginit−40.0939***0.0942***0.0932***0.0937***
(0.034)(0.033)(0.034)(0.034)
within-R2
0.85430.8859––0.85780.8870––
HansenJ-testp-value––0.55280.3765––0.63150.4118
N37913256370832033634313035563080
Countries154143147141145134139132
Years1965–20101965–20101965–20101965–20101970–20101970–20101970–20101970–2010
25

democratic political institutions, but we employ more stringent criteria for
coding a country-year observation as democratic. In the more stringent version
used here, a country-year observation must have a Polity IV score of greater
than 4 to be considered democratic. In the event that the Polity IV data is
not available, the more stringent criteria does not come into effect. In columns
5 – 8, we employ a democracy indicator that uses only the Polity IV data. As
is common, the indicator based only on the Polity IV defines a country-year
observation as a democracy for positive values and as a non-democracy for
non-positive values of the Polity IV index. Results are robust to both of these
alternative codings for the democracy indicator.
Instrumenting for pre-democracy inequality as well. In Table 8 we also
consider the possibility that the initial (pre-democracy) levels of inequality are
endogenously determined. For example, even when using the most stringent
coding for the initial level of inequality (five years before the switch to democ-
racy), it’s possible that autocrats use redistribution in attempt to prevent
a democratic transition. Such an endogenous relationship would mean that
our baseline results have over-estimated the conditional effect of democratic
switches (even if we should partly prevent this using lagged values of inequali-
ties much before transition occurs as our initial degree of inequality variable).
Using the historical agricultural instrument proposed by Easterly (2007) for
inequality, we can quite confidently eliminate the possible bias caused by such
a strategic redistribution. Recalling that the instrument is the ratio of land
suitable for growing wheat relative to sugarcane, Ag ratio is strongly nega-
tively correlated with Gini (initial pre-democracy inequality) in our sample.
We interact the dynamic share democracy instrument with the Ag ratio to
instrument the interaction term of interest. The first stage regressions are the
26

following:
D(0, 1)i,t = ζGinit−1 + η1Zi,t + η2Zi,t × Ag ratioi + θGDPi,t−1
+γi + δt + ei,t
D(0, 1)i,t × Ginii = ζGinit−1 + η1Zi,t + η2Zi,t × Ag ratioi + θGDPi,t−1
+γi + δt + ei,t.
(7)
We use the fitted values from equations (7) in the second stage as before.
While the historical nature of the inequality instrument ensures that it
satisfies the exclusion restriction, it comes at the cost of it’s relevance for
explaining modern income inequality (especially net). Nevertheless, the results
in Table 8 are encouraging. In columns 1 and 2 Ag ratio is used to instrument
for the interaction term with our baseline coding for the initial inequality
level, whereas in columns 3 and 4 it’s used to instrument for the interaction
with the simple coding. Unsurprisingly, the second stage estimate for the
interaction effect is less precisely estimated using Ag ratio as an instrument
for Gini in the interaction term, but we note that the joint effect remains
statistically significant. In columns 5 – 8, we pursue a more “reduced form”
specification in which we interact the Ag ratio instrument directly with the
democratic transition variable (as the potentially endogenous variable) and
then instrument for it with the interaction of the regional share democracy
with the Ag ratio. More formally, the first stage regressions that we estimate
for the second stage results shown in columns 5 – 8 are the following:
D(0, 1)i,t = ζGinit−1 + η1Zi,t + η2Zi,t × Ag ratioi
+θGDPi,t−1 + γi + δt + ei,t
D(0, 1)i,t × Ag ratioi = ζGinit−1 + η1Zi,t + η2Zi,t × Ag ratioi
+θGDPi,t−1 + γi + δt + ei,t.
(8)
Columns 5 and 6 show the second stage results when the net Gini is the
dependent variable and columns 7 and 8 are the analogues for when we use
the gross Gini coefficient as the dependent variable.
Further robustness checks. An online appendix re-estimate all of the spec-
27

Table8:EffectsofdemocracyontheGinicoefﬁcient,instrumentingforinitialinequalitylevelsaswell
TwoStageLeastSquares
NetGiniGrossGini
BaselineinteractionSimpleinteractionReducedformReducedform
(1)(2)(3)(4)(5)(6)(7)(8)
democracyt−111.4462**11.6551**13.2240*13.3585*7.8304**7.9296**23.6874***23.7034***
(4.726)(4.774)(6.844)(6.884)(3.465)(3.463)(8.304)(8.188)
democracyt−1×gini-0.2396*-0.2406*-0.2764-0.2744
(0.139)(0.140)(0.187)(0.187)
democracyt−1×giniIV-0.1304-0.1274-0.5830***-0.5719***
(0.085)(0.084)(0.211)(0.207)
logGDPpercapitat−10.72920.80230.83740.92191.27681.36652.9678*3.0861*
(1.174)(1.192)(1.247)(1.268)(1.032)(1.052)(1.542)(1.579)
JointF-testp-valuefrom2ndstage0.01760.01380.05780.04740.05080.04100.01700.0151
Excludedinstruments23232323
C-DF-statonexcludedinstruments65.61544.34563.40442.971166.991122.458144.962107.320
K-PrkF-statonexcludedinstruments4.4502.9033.8262.5549.6196.6418.1705.689
HansenJ-testp-value–0.3747–0.3134–0.2285–0.0830
Weak-instrument-robustp-value0.07760.05470.08520.05620.08520.05620.01660.0282
N37363718372637083726370836513635
Countries147147147147147147147147
Long-runeffectat90thpercentileGini-2.21-2.06-2.52-2.280.400.67-9.53-8.88
Years1961–20101961–20101961–20101961–20101961–20101961–20101961–20101961–2010
28

ifications we have presented in the paper using five-year panels.13
Results are
qualitatively consistent with those from the estimations using annual data, but
estimates are somewhat more volatile across the various specifications. Nev-
ertheless, the main themes from the annual panels hold up: (i) there is no sta-
tistically significant unconditional effect of democratic switches; (ii) the effect
of democratic switches conditional on initial inequality levels is highly statisti-
cally significant; (iii) after a democratic switch inequality increases in countries
that were initially egalitarian and inequality decreases in countries that were
initially unequal; (iv) our proposed set of instruments is both relevant and
exogenous and 2SLS regressions corroborate the OLS findings; (v) the results
are robust to using market data, to simpler constructions of pre-democracy
inequality levels, and to intuitive sample restrictions; and (vi) results from a
2SLS procedure that also instruments for the initial level of inequality using
the Easterly instrument are consistent with those from the baseline specifica-
tion.
Finally, since fixed effects regression estimates can be biased by the inclu-
sion of lagged dependent variables (Nickel, 1981), in the online appendix we
also estimate our baseline specification with a standard generalized method
of moments (GMM) estimator along the lines of Arellano and Bond (1991),
rather than with fixed effects OLS regressions. Using the Arellano-Bond GMM
estimator, we estimate our baseline specification using both annual and five
year panels, using both net and gross income inequality measures.14
Our main
result is robust to this alternative estimation technique.
13
Starting from 1960, we take the variables’ values in the first year of each five-year panel.
Variables that are lagged one period are thus lagged five years.
14
Following Acemoglu et al. (2015), we include the lagged dependent variable as a control,
remove country fixed effects by taking forward orthogonal differences, collapse the number
of lags used as instruments, and report the AR(2) p-value.
29

4 Discussion
4.1 Possible mechanisms
In this section, we briefly discuss several possible mechanisms that could be
driving the conditional income inequality dynamics that we have empirically
documented. The first relates to the economic institutional change that ac-
companies political transitions to democracy, which could plausibly contribute
to increases or decreases in inequality levels. The second relates to the shift in
political representation towards the preferences of the “median voter”. Third,
we note that democratization is often associated with structural economic
transitions out of agricultural production that may increase inequality levels.
Finally, we observe that inequality may have very historically deep roots that
autocratic governments may not attempt to reverse. On net, the mechanisms
through which democratization may affect the distribution of income do not
operate uniformly, and indicate why unconditional tests of the effect have usu-
ally turned up null results. Empirically teasing out which mechanism is the
most relevant and has the strongest impact on our middle ground result is
beyond the scope of the present paper, however.
First of all, transitions to democratic political institutions involve institu-
tional changes that transcend the political, including those that govern eco-
nomic, educational, and public health systems. Generally speaking, reforms
to these areas of public life could have either equalizing or polarizing effects on
income distributions. First, liberalizing political institutions often leads to lib-
eralizing economic reforms that make economies more competitive through, for
example, the removal of barriers to entry (De Haan and Sturm, 2003; Djankov
et al., 2002; Fidrmuc, 2003; Méon and Sekkat, 2016; Rode and Gwartney,
2012). Increased entrepreneurial opportunities may allow for some new high in-
comes to be created, increasing inequality. Indeed, Dorsch and Maarek (2015)
provide a theory of political transitions in which removal of such opportunity-
suppressing barriers to entry may be the institutional grievance that prompts a
democratic concession by the elite.15
Additionally, democracies tend to invest
15
Though they do not explicitly derive the impact of democratization on income inequality,
30

more in the productive capacity of their populations through greater provision
of public goods as well as increased and more broadly spread education and
health care (Acemoglu et al., 2005, 2015). The net eﬀect of greater public
investment on inequality levels could go either way.
Second, upon democratization, leaders must establish broader coalitions
of political support than those necessary to maintain power in an autocracy
(Bueno de Mesquita et al., 2003). Many autocrats establish small coalitions
of intense support in the extremes of the income distribution, with populist
regimes courting the poor and elitist regimes courting the rich (Acemoglu et al.,
2004). Which subgroups a leader forms coalitions with may depend on many
factors, such as the cost of revolt and/or suppression, geography and the qual-
ity of infrastructure, the country’s military tradition, etc. Autocratic leaders
cultivate political coalitions according to the relative power of the subgroups
in society and form extreme policies to beneﬁt their coalition of support. Ex-
treme policy positions yield (or protect) extreme distributional outcomes, from
highly equal communistic regimes to highly unequal elite-dominated regimes.
Democratic governance is more inclusive and political leaders must establish
broader coalitions which naturally expand to the middle. Thus, in practice,
the critical member of the minimum winning coalition in a democracy is likely
to be more central in the distribution of policy preferences than previously.
If policy preferences are monotonic in income level, the center of the policy
preference distribution corresponds to the center of the income distribution.
As such, for both highly unequal and egalitarian autocracies, the decisive dis-
tributional policy preference is likely to move to a middle ground following
democratization, reducing inequalities in the elite-dominated societies and in-
creasing inequality in the communistic societies.
Third, democratization may be associated with structural economic changes.
For agricultural societies, democratization may induce industrialization and
urbanization. As worker productivity and wages increase as the economy
industrializes, many former peasants are brought out of poverty. As indus-
in their model, democratization that removes barriers to entry would increase the level of
inequality in society.
31

trial production has more unequal incomes than agricultural production, a
structural shift towards industrial production should lead to higher income
inequality. This is the main argument Kuznets (1955) uses to explain why
development affects economic inequality. In autocracies, independent of the
level of economic development (which induces structural transformation and
for which we control in the regressions), the elite may block the introduction of
new modern technologies of production (which would induce structural change
if implemented) in order to keep rents in sectors they operate. In line with such
theories, Acemoglu et al. (2014) show that democratization fosters structural
change through the development of industry. This effect (and the subsequent
impact on income inequalities) could be strong in countries in which the elite
dominated some sectors.
Finally, politics in autocracies may have had nothing do with the level of
income inequality and don’t pursue policies to modify them. Inequality may
simply have deep historical roots (Easterly, 2007) and following a transition
to democracy, politicians will engage in redistribution and specific policies for
reducing inequalities only in countries in which inequalities are high and there
exists some margin to redistribute.
4.2 Comparison with related literature
The paper is most closely related to Acemoglu et al. (2015), who also inves-
tigate the effect of democracy on levels of inequality. The literature review
found there convincingly documents that there is no empirical consensus con-
cerning 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 inequality.
Acemoglu et al. (2015), however, include some specifications which allow
for democracy to have heterogeneous effects according to land inequality, share
of agriculture in the economy, as well as top and bottom decile income shares.
They find evidence that countries where land is more unequally distributed
see income inequality increase upon democratization, which they describe as
32

providing evidence for elite capture of new democracies. If land inequality
and (pre-democracy) income inequality are inversely related, then this result
is consistent with our results. They also find evidence that highly agricultural
economies become more unequal after democracy, which they describe in terms
of the increased market opportunities that are available outside of agriculture
following a switch to democracy. Again, to the extent that highly agricultural
economies are those with low levels of (pre-democracy) inequality, then this is
consistent with the results that we have presented.
However, they find no consistent evidence that bottom or top decile income
shares shape post-democratization income inequality dynamics. While Ace-
moglu et al. (2015) do consider several interesting heterogeneous responses to
democratic switches, our paper complements their results substantially. The
conditional effect that we have investigated is more general and rests on the
intuition that democracy provides a middle ground on which societies with
relatively extreme income distributions can converge. Our results clearly in-
dicate that the effect is conditional on initial levels of inequality, and not
a more general process of economic development following democratization.
Furthermore, we have pursued an instrumental variables strategy and demon-
strated that the conditional effect of democracy on income inequality can be
interpreted causally.
Even though our paper has considered the effect of democratization on in-
equality levels, it is also relevant for the literature on the causes of democrati-
zation. The canonical rational choice model of democratization (Acemoglu and
Robinson, 2001, 2006) supposes that democratically-determined fiscal redistri-
bution follows the logic established by Meltzer and Richard (1981), Roberts
(1977), and Romer (1975), where democracies with greater inequality redis-
tribute more. In the democratization model, higher inequalities are associated
with a higher probability of a transition to democracy, as the greater poten-
tial for democratic fiscal redistribution increases the revolutionary threat.16
The empirical literature that examines this relationship has also found largely
16
Technically, the theory predicts an inverted U relationship, as if the redistribution under
democratic fiscal policy is anticipated to be too great, then the elite will fight to prevent it.
33

null results (see, for example, Houle 2009 and Teorell 2010 and the references
therein), but the tests are generally on the unconditional effect of inequal-
ity. Some scholars have questioned whether inequality and redistribution are
actually important for democracy and transitions towards it (Haggard and
Kaufman 2012 or Knutsen and Wegmann 2016, for example). Our results
show that existing critiques of the logic established by the canonical rational
choice model of democratization based on the available empirical evidence are
perhaps not convincing. We have demonstrated that inequality does fall fol-
lowing democratization in countries where inequality was very high. Therefore,
high inequality levels can be a source of tension that drives democratization,
but it’s not a general pattern because some autocracies are quite egalitarian
with little to redistribute.
5 Concluding remarks
There is no consensus in the empirical literature about whether or not autoc-
racies that democratize become more egalitarian. We propose that the reason
for this is that autocracies are highly heterogeneous, especially with respect
to how incomes are distributed. Intuitively, autocracies allow for extreme pol-
icy outcomes that might not be possible in democratically governed societies,
where policy choices should follow more closely the preferences in the middle
of the distribution of preferences. Allowing for the effect of democracy to be
conditional on pre-democracy inequality levels, we demonstrate a robustly sta-
tistically significant conditional effect of democratization on inequality levels.
Highly unequal autocracies become more equal following switches to democ-
racy, whereas egalitarian autocracies become less equal following switches to
democracy. In sum, democratization has a strong impact on inequality levels,
but the effect pushes in opposite directions depending on prevailing levels of
inequality prior to the switch to democracy, which rationalizes the typical null
result found in the literature. An instrumental variable analysis suggests that
the effect of democracy on income inequality can be interpreted causally.
The objective of our paper was mainly to explain the counter-intuitive null
34

result found in the literature and demonstrate that democratic transitions are
not at all neutral events in terms of the dynamics of income inequality. The
basic observation with which we began the paper, that autocracies are very
heterogeneous according to inequality levels, provides an interesting starting
point for further future research. We have brieﬂy discussed some intuition
for these heterogeneities and for the converging dynamics that democratiza-
tion sets oﬀ, but a full characterization of those mechanisms is an important
research program for the future.
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6 For Online Publication
Table 9: Democratic Switches in our Baseline Sample
Year Country Initial net Gini Country Year Initial net Gini
1997 Albania 28.09 1991 Madagascar 46.87
1983 Argentina 40.03 1994 Malawi 58.69
1991 Bangladesh 28.32 1972 Malaysia 50.56
2009 Bangladesh 37.68 1983 Malaysia 43.86
1998 Armenia 41.19 1992 Mali 36.02
1983 Botswana 53.53 1994 Mexico 46.18
1985 Brazil 55.18 1990 Nepal 28.06
1990 Bulgaria 22.68 1999 Niger 42.14
2003 Burundi 38.38 1999 Nigeria 52.27
1991 Cape Verde 40.11 1988 Pakistan 33.61
1993 Central African Rep. 58.69 1990 Panama 47.26
1983 Sri Lanka 45.02 1993 Peru 55.14
1989 Chile 51.17 1986 Philippines 45.16
1992 Taiwan 26.90 1989 Poland 24.91
2002 Comoros 50.78 1994 Guinea-Bissau 51.56
1999 Croatia 31.12 1999 Guinea-Bissau 48.27
1983 El Salvador 46.95 2005 Guinea-Bissau 38.97
1983 Fiji 39.13 1991 Romania 19.69
1990 Fiji 41.36 2000 Senegal 40.35
1999 Djibouti 38.12 1996 Sierra Leone 61.41
1996 Ghana 38.56 2001 Sierra Leone 54.52
1974 Greece 33.67 1973 South Africa 65.07
1986 Guatemala 43.60 1983 South Africa 64.91
1992 Guyana 42.12 1978 Zimbabwe 55.30
1990 Haiti 53.77 1976 Spain 30.36
1994 Haiti 53.80 1974 Thailand 49.07
1989 Hungary 21.54 1978 Thailand 47.08
1999 Indonesia 36.73 1992 Thailand 49.66
2000 Cote d’Ivoire 37.01 1973 Turkey 52.96
2002 Kenya 47.40 1983 Turkey 50.09
1987 Korea, South 35.92 1985 Uruguay 40.50
2005 Kyrgyzstan 35.65 1991 Zambia 61.29
2005 Lebanon 43.48
1993 Lesotho 59.06
1999 Lesotho 59.01
Notes: Democratic switches are coded as in the baseline speciﬁcation.
41

Figure 5: The marginal effect of a democratic transition on net Gini coefficients, condi-
tional on the initial (pre-democracy) level of inequality. The figure is based on regression
estimates from column (4) of Table 10. Dashed lines represent 90% confidence intervals.
42

Table10:EffectsofdemocracyonthenetGinicoefﬁcient,5-yearpanels
(1)(2)(3)(4)(5)(6)(7)(8)
democracyt−10.60910.02834.5702**5.9845***2.33488.5507***1.67818.5776***
(0.735)(0.724)(2.199)(1.773)(1.709)(3.281)(1.600)(3.019)
democracyt−1×gini-0.1016*-0.1486***-0.1654***-0.1928***
(0.053)(0.044)(0.062)(0.061)
logGDPpercapitat−11.7820*1.8168**1.24781.3774*1.8983**1.41761.63360.9458
(0.946)(0.810)(1.074)(0.796)(0.959)(0.908)(1.053)(1.015)
ginit−10.3610***0.3819***0.3473***0.3723***0.3593***0.3801***
(0.067)(0.064)(0.066)(0.063)(0.071)(0.067)
JointF-testp-value––0.11880.0033–0.0229–0.0061
within-R2
0.04270.17580.05150.2042––––
HansenJ-testp-value––––––0.71000.5888
N799660666660641641590590
Countries154141141141130130115115
Long-runeffectat90thpercentileGini0.610.04-1.22-4.023.6-1.402.62-3.88
Years1960–20101970–20101970–20101970–20101965–20101965–20101965–20101965–2010
43

Table11:EffectsofdemocracyonthegrossGinicoefﬁcient,5-yearpanels
(1)(2)(3)(4)(5)(6)(7)(8)
democracyt−1-0.31820.00633.04398.2006***3.26867.7957**1.90508.3816***
(1.086)(0.847)(4.629)(2.491)(2.169)(3.175)(1.920)(2.816)
democracyt−1×gini-0.0644-0.1862***-0.1251*-0.1876***
(0.099)(0.055)(0.069)(0.066)
logGDPpercapitat−13.7457**2.6070**3.6392*2.1995*2.6040*2.3336*2.46291.8248
(1.539)(1.318)(1.855)(1.201)(1.501)(1.353)(1.539)(1.292)
ginit−10.5267***0.5508***0.5248***0.5414***0.5163***0.5429***
(0.055)(0.051)(0.055)(0.053)(0.054)(0.050)
JointF-testp-value––0.80470.0038–0.0491–0.0082
within-R2
0.09460.31840.06720.3446––––
HansenJ-testp-value––––––0.73370.7753
N791651656651631631585585
Countries154141141141129129115115
Long-runeffectat10thpercentileGini-0.320.010.864.226.887.773.947.05
Long-runeffectat90thpercentileGini-0.320.01-0.82-6.616.880.643.94-5.05
Years1960–20101970–20101970–20101970–20101965–20101965–20101965–20101965–2010
44

Table12:EffectsofdemocracyonthenetGinicoefﬁcientwithsimpleinteractions,5-yearpanels
Fixedinitialinequalityinteraction–simpleOncelaggedinitialinequalityinteraction
OLS2SLSOLS2SLS
(1)(2)(3)(4)(5)(6)(7)(8)
democracyt−12.10687.3131***9.2385**9.2889***3.97567.8343***10.6912***9.8057***
(2.379)(1.793)(3.732)(3.303)(2.459)(1.737)(3.525)(3.257)
democracyt−1×gini-0.0411-0.1789***-0.1774***-0.2030***
(0.054)(0.043)(0.065)(0.061)
democracyt−1×ginit−1-0.0936-0.1957***-0.2258***-0.2205***
(0.058)(0.045)(0.064)(0.064)
logGDPpercapitat−11.43121.32801.41840.92151.75591.23131.20630.9674
(1.084)(0.846)(0.971)(1.095)(1.178)(1.019)(1.138)(1.213)
ginit−10.4225***0.4096***0.4246***0.4058***0.4041***0.4016***
(0.063)(0.063)(0.065)(0.058)(0.058)(0.062)
within-R2
0.03980.2076––0.05480.1890––
HansenJ-testp-value–––0.6486–––0.9903
Weak-instrument-robustp-value––0.04990.0257––0.00790.0296
N660660641590630617591549
Countries141141130115141141123109
Long-runeffectat90thpercentileGini2.11-2.88-1.48-3.95-1.36-5.59-3.65-4.61
Years1965–20101965–20101965–20101965–20101970–20101970–20101970–20101970–2010
45

Table13:EffectsofdemocracyonthenetGini,alternativesamples,5-yearpanels
ExcludingformerUSSRExcludingformerUSSR&WarsawPactExcludingcountriesneverautocratic
OLS2SLSOLS2SLSOLS2SLS
(1)(2)(3)(4)(5)(6)(7)(8)(9)
democracyt−15.9925***8.6633***8.5415***5.7362**9.0813*9.2706*7.9126***14.9298***14.5982***
(1.779)(3.235)(3.021)(2.784)(5.397)(4.852)(1.832)(4.406)(4.029)
democracyt−1×gini-0.1487***-0.1749***-0.1923***-0.1438**-0.1911*-0.2126**-0.1794***-0.2207***-0.2289**
(0.044)(0.060)(0.061)(0.063)(0.100)(0.095)(0.045)(0.083)(0.091)
logGDPpercapitat−11.4346*1.44370.98781.4102*1.31940.80961.19770.86640.6983
(0.820)(0.918)(1.025)(0.838)(0.903)(1.021)(0.937)(1.324)(1.487)
ginit−10.3746***0.3673***0.3784***0.3784***0.3841***0.3955***0.3554***0.3172***0.3125***
(0.066)(0.065)(0.068)(0.071)(0.071)(0.072)(0.074)(0.069)(0.073)
Country&yearﬁxedeffectsyesyesyesyesyesyesyesyesyes
within-R2
0.2025––0.1834––0.2421––
JointF-testp-valuefrom2ndstage0.00350.01380.00650.06850.13800.06630.00020.00290.0013
Excludedinstruments–23–23–23
C-DF-statonexcludedinstruments–32.81720.385–29.00619.862–11.4156.256
K-PrkF-statonexcludedinstruments–11.0426.416–10.3576.326–4.9632.814
HansenJ-statp-value––0.6078––0.9917––0.8582
Weak-instrument-robustp-value–0.02080.0245–0.16430.2057–0.00240.0034
N627609582595578552436423390
Countries1261161111201111031109078
Long-runeffectat10thpercentileGini3.056.095.242.876.215.674.6212.9812.07
Long-runeffectat90thpercentileGini-3.96-2.06-3.88-3.95-2.94-4.70-3.583.452.26
Years1965–20101965–20101965–20101965–20101965–20101965–20101965–20101965–20101965–2010
46

Table14:EffectsofdemocracyontheGinicoefﬁcient,instrumentingforinitialinequalitylevelsaswell,5-yearpanels
TwoStageLeastSquares
NetGiniGrossGini
BaselineinteractionSimpleinteractionReducedformReducedform
(1)(2)(3)(4)(5)(6)(7)(8)
democracyt−113.2406**14.8166**12.4255*13.6282*8.6127**9.0616**14.9709**15.0699**
(6.465)(7.232)(7.542)(8.183)(4.124)(4.154)(7.213)(7.509)
democracyt−1×gini-0.2361-0.2987-0.2130-0.2560
(0.175)(0.208)(0.194)(0.218)
democracyt−1×giniIV-0.1120-0.1294-0.2900-0.3207*
(0.099)(0.102)(0.179)(0.185)
logGDPpercapitat−11.00110.73371.07070.87831.59541.56733.24173.2657
(1.333)(1.625)(1.406)(1.699)(1.243)(1.421)(2.080)(2.227)
JointF-testp-valuefrom2ndstage0.03850.03910.08510.09130.05210.04380.09950.1277
Excludedinstruments23232323
C-DF-statonexcludedinstruments10.9965.69413.0597.24527.98017.77224.57616.006
K-PrkF-statonexcludedinstruments3.4771.9133.4621.7727.5924.2446.7883.832
Hansenp-value–0.7794–0.6134–0.6274–0.5303
Weak-inst.robustp-value0.04270.05040.04690.06520.04690.06520.11550.1835
N647597641590641590631585
Countries130116130115129115129115
Long-runeffectat90thpercentileGini-0.21-2.200.29-0.962.231.69-2.42-4.17
Years1965–20101965–20101965–20101965–20101965–20101965–20101965–20101965–2010
47

Table 15: Effects of democracy on the the Gini coefficient, GMM regressions
Yearly panels 5-year panels
Net Gini Gross Gini Net Gini Gross Gini
(1) (2) (3) (4)
democracyt−1 3.0915*** 2.0718* 7.3395** 6.1339*
(0.840) (1.074) (3.395) (3.344)
democracyt−1 × gini -0.0731*** -0.0403* -0.1751** -0.1291*
(0.020) (0.022) (0.084) (0.076)
log GDP per capitat−1 -0.1022 0.5452*** -0.4870 2.5716
(0.206) (0.174) (1.543) (2.068)
ginit−1 0.9662*** 0.9738*** 0.5896*** 0.7136***
(0.018) (0.015) (0.075) (0.056)
Year fixed effects yes yes yes yes
Joint F-test p-value 0.0013 0.1529 0.0977 0.1893
Number of instruments 272 272 220 219
AR(2) p-value 0.264 0.066 0.749 0.898
N 3788 3713 660 651
Countries 154 154 141 141
Number of democracy changes 104 102 69 68
L-R effect at 10th percentile Gini 32.01 26.98 6.15 6.16
L-R effect at 90th percentile Gini -31.84 -13.26 -6.43 -5.61
Notes: Robust standard errors clustered by country are in parentheses. Data
covers the period 1961 – 2010.
*** Significant at the 1 percent level.
** Significant at the 5 percent level.
* Significant at the 10 percent level.
48

Democratization and the conditional dynamics of income distribution

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Democratization and the conditional dynamics of income distribution