Democracy, Redistribution and Inequality | 2014
Joint with Daron Acemoglu, James Robinson and Suresh Naidu
Published in the Handbook of Income Distribution
This study revisits the relationship between democracy, redistribution, and inequality. We first review the theoretical reasons which suggest that democracy increases redistribution and reduce inequality. This prediction may fail to be realized when democracy is captured by the richer segments of the population; when democracy caters to the preferences of the middle class; or when democracy opens up disequalizing opportunities to segments of the population previously excluded from such activities, thus exacerbating inequality among a large part of the population. We then survey the existing voluminous empirical literature, which is full of contradictory results. We provide new and systematic reduced-form evidence of the dynamic impact of democracy on various outcomes, and we propose several conclusions. First, democracy has a significant and robust effect on tax revenues as a fraction of GDP, but it does not robustly impact inequality. Second, democracy is associated with an increase in secondary schooling and a more rapid transformation from agricultural to urban societies. Third, inequality tends to increase after democratization in more urban societies, when land inequality is high, and when the middle class have a similar income than the poor. These conclusions differ from those provided by the traditional median voter model of democratic redistribution. Democracy does not lead to a uniform decline in post-tax inequality, but it can produce changes in fiscal redistribution and economic structure that have ambiguous effects on inequality.