Some New Evidence on Economic Freedom and Income Distribution

While the extant literature shows that various indices of economic freedom display a positive relationship with the level of income inequality, it is unclear who are the winners and, in particular, the losers. For this reason, an analysis based on deciles and top percentiles helps to deepen the understanding of this issue. Starting from this consideration, the paper adds new evidence on the relation between economic freedom and income distribution by analysing a panel of 70 developing and developed countries for the period 1980–2014. The effects of economic freedom on income shares by deciles and top percentiles are estimated through an instrumental-variable approach ruling out potential reverse causality. Results show that economic freedom increases the income shares of the percentiles included in the top decile, eroding the income of the middle and, especially, upper-middle segments. The poor, instead, appear to be unaffected.