Digitized by the Internet Archive in 2011 with Funding from Boston Library Consortium Iviember Libraries Technology Department of Economics Working Paper Series ' Income and Democracy? Income and Democracy*

We revisit one of the central empirical findings of the pohtical economy literature that higher hicome per capita causes democracy. Existing studies estabUsh a strong cross-country correlation between income and democracy, but do not tjqaically control for factors that simultaneously affect both variables. We show that controlling for such factors by including country fixed effects removes the statistical association between income per capita and various measures of democracy. We also present instrumental-variables estimates using two different strategies. These estimates also show no causal effect of income on democracy. Furthermore, we reconcile the positive cross-country correlation between income and democracy with the absence of a causal effect of income on democracy by showing that the long-run evolution of income and democracy is related to historical factors. Consistent with this, the positive correlation between income and democracy disappears, even without fixed effects, when we control for the historical determinants of economic and pohtical development in a sample of former European colonies.