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Recent research shows that lower levels of income inequality cause higher levels of democracy, and vice versa in a simultaneous relationship. A critical factor missing from these studies is a direct exogenous measure of capitalism in models explaining variation in income inequality and democracy. This study examines 50 countries over the years 1978-1993 and finds in a pooled two stage least squares modeling exercise that the Fraser Institute measure of capitalism appears to have a positive linear impact on POLITYIV measures of democracy and a negative linear impact on income inequality (more capitalism, more inequality). There appears to be no higher-order relationship between capitalism and democracy or income inequality, though there is a parabolic relationship between democracy and income inequality.

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This is an author-produced, peer-reviewed version of this article. The final, definitive version of this document can be found online at Comparative Sociology, published by Brill Academic Publishers. Copyright restrictions may apply. DOI: 10.1163/156913307X233683