Income Distribution, Political Instability and Investment

Alberto Alesina, Harvard University
Roberto Perotti, Columbia University


This paper successfully tests on a sample of 71 countries for the period 1960-85 the following hypotheses. Income inequality, by fueling social discontent, increases socio-political instability. The latter, by creating uncertainty in the politico-economic environment, reduces  investment. As a consequence, income inequality and investment are inversely related. Since investment is a primary engine of. growth, this paper identifies a channel for an inverse relationship between income inequality and growth.

We measure socio-political instability with indices which capture the occurrence of more or less violent phenomena of political unrest and we test our hypotheses by estimating a two-equation model in which the endogenous variables are investment and aiji index of
socio-political instability.

Our results are robust to sensitivity analysis on the specification of the ijnodel and the measure of political instability, and are unchanged when the model is estimated using robust regression techniques.