The Unrest Link: Does Income Inequality Impact investment through Socio-Political Instability?

This paper examines the socio-political instability link between inequality and investment. For the period between 1960 and 2011 for 192 countries, this paper finds no significant correlation between inequality and instability and no significant correlation between instability and investment when country fixed effects are taken into account. It does find a positive and significant effect of inequality on investment directly. This runs counter to theory that suggests that higher inequality creates instability through demand for redistribution, which in turn makes property rights more uncertain and markets more risky, discouraging investment. This finding contradicts a widely-cited 1996 paper by Alesina and Perotti which does find the unrest link to be significant.