The Impact of Economic Inequality on Economic Freedom
17 Pages Posted: 18 May 2014 Last revised: 9 Sep 2015
Date Written: May 16, 2014
This paper tests the hypothesis that the presence of economic inequality may lead to erosions of economic freedom. Using Economic Freedom of the World as a measure of free economic institutions, it finds that a one standard deviation increase in the gini coefficient reduces the presence of free economic institutions by 0.18 standard deviations. This effect is modest but not at all trivial, and the magnitude of the effect may be especially important in increasing the size of government. Surprisingly, the evidence is mixed for the effect of inequality on regulation, with modest evidence suggesting it may improve the regulatory environment. While many methods of reducing economic inequality involve restrictions on economic freedom, this evidence underscores the importance of stressing reforms free market proponents are confident will mitigate inequality.
Keywords: Economic Freedom, Inequality, Institutions
JEL Classification: D31, P1
Suggested Citation: Suggested Citation