ECONOMIC FREEDOM AND INCOME INEQUALITY REVISITED: EVIDENCE FROM A PANEL ERROR CORRECTION MODEL |
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| Authors: | NICHOLAS APERGIS OGUZHAN DINCER JAMES E. PAYNE |
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| Affiliation: | 1. Apergis: Chair and Professor, Department of Banking and Financial Management, University of Piraeus, Piraeus, Attiki 18534, Greece. Phone +3210‐414‐2429, Fax +3210‐414‐2341, E‐mail napergis@unipi.gr;2. Dincer: Assistant Professor, Department of Economics, Illinois State University, Normal, IL 61790‐4100. Phone 309‐438‐7071, E‐mail odincer@ilstu.edu;3. Payne: Provost and Vice President for Academic Affairs, University of New Orleans, New Orleans, LA 70148. Phone 504‐280‐7199, Fax 504‐280‐6020, E‐mail jepayne@uno.edu |
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| Abstract: | We investigate the causal relationship between income inequality and economic freedom using data from U.S. states over the period 1981 to 2004 within a panel error correction model framework. The results indicate bidirectional causality between income inequality and economic freedom in both the short and the long run. These results suggest that high income inequality may cause states to implement redistributive policies causing economic freedom to decline. As economic freedom declines, income inequality rises even more. In other words, it is quite possible for a state to get caught in a vicious circle of high income inequality and heavy redistribution. (JEL D63, H11) |
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