The Causal Nexus Between Democracy, Happiness, and Income Distribution: Evidence From Developed and Developing Nations

Abstract

This study provides evidence for the causal relationship between democracy, happiness, and income distribution. Using data on income distribution from 35 developed and 26 developing countries, we employ a panel vector autoregressive (PVAR) model and analyze annual panel data from 2006 to 2022. The key finding is that democracy, happiness, and income distribution share a long-term, co-integrated relationship. In both developed and developing countries, democracy and happiness exhibit a two-way Granger causality, with positive impulse responses observed through panel VEC Granger causality analysis. For developing countries, democracy and income distribution equality also show a positive causal relationship. However, in developed countries, no significant Granger causality exists between democracy and the Gini index, which measures income inequality. Additionally, we find that happiness and the Gini index are linked in a two-way causal relationship, experiencing negative shocks in both developed and developing countries. These findings have significant policy implications, especially for leaders in developing countries who should promote democracy to enhance happiness and income distribution equality. Policymakers should consider that equitable income distribution can contribute to societal happiness. Creating an environment that supports both happiness and income equality is essential to foster demand for democracy, particularly in developing nations.