A Nonparametric and Semiparametric Analysis on the Inequality-Development Relationship

This paper studies the income inequality and economic development relationship by using unbalanced panel data on OECD and non-OECD countries for the period 1962 2003. Nonparametric estimation results show that income inequality in OECD countries are almost on the backside of the inverted-U, while non-OECD countries are approximately on the foreside, except that the relationship in both country groups shows an upturn at a high level of development. Development has an indirect effect on inequality through control variables, but the modes are different in the two groups. Model specification tests show that the relationship is not necessarily captured by the conventional quadratic function. Cubic and fourth-degree polynomials, respectively, fit the OECD and non-OECD country groups better. Our finding is robust regardless whether the specification uses control variables. Development plays a dominant role in mitigating inequality.