Income distribution, political instability, and investment

Consequently, income inequality and investment are inversely related. This hypothesis, tested on 64 countries during the period 1960-1985, is examined in this paper. Because investment is a primary engine of growth the paper identifies a channel for the frequently noticed inverse relationship between income inequality and growth. The paper measures socio-political instability with a composite index which captures the occurrence of violent phenomena of political unrest. The hypothesis is then tested by estimating a two-equation model in which the endogenous variables are investment and the index of socio-political instability. The results are robust to sensitivity analysis on the specification of the model and are unchanged when the model is estimated using robust regression techniques. (Author abstract)