Life May Be Unfair, But Do Democracies Make It Any Less Burdensome?

Abstract

Using a large panel of countries, this paper studies whether, or not, democracies can disproportionately produce better economic outcomes for the poor than non-democracies. To deal with the endogeneity of democracy and inequality, a regional democratisation wave is used to isolate the exogenous variation in country-level democracy. Our main finding is that the exogenous component of democracy significantly and robustly decreased inequality, after controlling for key inequality determinants. We identify that two potential mechanisms through which democracy affects inequality are structural transformation and middle-class bias channels.