Deep Roots of Income Inequality

Abstract

This paper examines the roots of income inequality. It aims to answer the questions such as how deep the roots of current income inequality are. What are the specific channels through which early historical developments explain current inequality, and to what extent? Advancing Putterman and Weil’s (2010) inequality hypothesis of early development of our ancestors, this work finds that prehistoric development traits of our ancestors transmitted through ancestral year 1500 level of technological sophistication have significant effect on current income inequality. The results are in line with Diamond’s (1997) hypothesis of geographical advantage of Eurasians against the others due to the advantage of East-West orientation of the continents. They are also robust controlling for the post-Columbian redistribution of endowments and evolution of institutions that correspond to Engerman and Sokoloff’s (1997) endowment hypothesis, and Acemoglu, Johnson and Robinson’s (2001) institution hypothesis. The study finds that a one standard deviation decrease in the variation of year 1500 technology of the ancestors of current population is associated with a 0.6 standard deviation decrease in income inequality measured by UNU-WIDER Gini index. As a by-product of the analysis, it finds that variation in ancestral year 1500 technology is a stronger predictor of current income inequality than variation in ancestral year 1500 state history, which seems to be an established predictor of income inequality in the early development literature.