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The effect of military spending on income inequality: evidence from NATO countries

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  • Chletsos Michael

    (University of Ioannina)

  • Roupakias Stelios

    (National Institute of Labour and Human Resources
    University of Ioannina)

Abstract

This paper analyzes the impact of defense spending on income inequality in 14 NATO countries, using SIPRI data for the period 1977–2007. We account for potential endogeneity by employing a novel instrumental variables approach. Specifically, we use the predicted “shift-share” defense as an instrument, in the fashion of Bartik (Who benefits from state and local economic development policies? WE Upjohn Institute for Employment Research, Kalamazoo, 1991). Our identification strategy indicates that defense causes inequality to decrease. The short-run elasticity of inequality with respect to military expenditure is − 0.075. This finding withstands several tests of robustness. Importantly, similar results are obtained when the long-run relationship is scrutinized via the implementation of second-generation panel co-integration and causality techniques, robust to cross-sectional dependence.

Suggested Citation

  • Chletsos Michael & Roupakias Stelios, 2020. "The effect of military spending on income inequality: evidence from NATO countries," Empirical Economics, Springer, vol. 58(3), pages 1305-1337, March.
    • Handle: RePEc:spr:empeco:v:58:y:2020:i:3:d:10.1007_s00181-018-1576-7
    DOI: 10.1007/s00181-018-1576-7
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    19. Töngür, Ünal & Hsu, Sara & Elveren, Adem Yavuz, 2015. "Military expenditures and political regimes: Evidence from global data, 1963–2000," Economic Modelling, Elsevier, vol. 44(C), pages 68-79.
    20. Andrew Berg & Jonathan D. Ostry & Charalambos G. Tsangarides & Yorbol Yakhshilikov, 2018. "Redistribution, inequality, and growth: new evidence," Journal of Economic Growth, Springer, vol. 23(3), pages 259-305, September.

    More about this item

    Keywords

    Military expenditure; Inequality; Panel co-integration; Income distribution; Instrumental variables (IV) estimation;
    All these keywords.

    JEL classification:

    • H56 - Public Economics - - National Government Expenditures and Related Policies - - - National Security and War
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation

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