Economic Freedom and Income Inequality Revisited: Evidence from a Panel Error Correction Model

9 Pages Posted: 20 Nov 2013

See all articles by Nicholas Apergis

Nicholas Apergis

University of Piraeus; University of Derby

Oguzhan C. Dincer

Illinois State University - Department of Economics; Harvard University - Edmond J. Safra Center for Ethics

James E. Payne

Illinois State University

Date Written: January 2014

Abstract

We investigate the causal relationship between income inequality and economic freedom using data from U.S. states over the period 1981 to 2004 within a panel error correction model framework. The results indicate bidirectional causality between income inequality and economic freedom in both the short and the long run. These results suggest that high income inequality may cause states to implement redistributive policies causing economic freedom to decline. As economic freedom declines, income inequality rises even more. In other words, it is quite possible for a state to get caught in a vicious circle of high income inequality and heavy redistribution.

JEL Classification: D63, H11

Suggested Citation

Apergis, Nicholas and Dincer, Oguzhan C. and Payne, James E., Economic Freedom and Income Inequality Revisited: Evidence from a Panel Error Correction Model (January 2014). Contemporary Economic Policy, Vol. 32, Issue 1, pp. 67-75, 2014. Available at SSRN: https://ssrn.com/abstract=2357218 or http://dx.doi.org/10.1111/j.1465-7287.2012.00343.x

Nicholas Apergis

University of Piraeus ( email )

Karaoli and Dimitriou 80
80 KARAOLI & DIMITRIOU STREET
Piraeus, Attiki 18534
Greece

University of Derby ( email )

Kedleston Road
Derby, Derbyshire DE22 1GB
United Kingdom

Oguzhan C. Dincer

Illinois State University - Department of Economics ( email )

Normal, IL 61790-4200
United States

Harvard University - Edmond J. Safra Center for Ethics ( email )

124 Mount Auburn Street
Suite 520N
Cambridge, MA 02138
United States

James E. Payne

Illinois State University ( email )

Normal, IL 61790
United States

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