Explaining the two-way causality between inequality and democratization through corruption and concentration of power

Corruption increases inequality in the society (Gupta et al, 1998) by reducing economic growth, biasing the tax system, reducing the amount and the efficiency of spending on key areas for human capital formation. Mohtadi and Roe (2002) and Mohtadi and Agarwhal (2002) argue that democracy first increases corruption due to the newly introduced freedom and rights, and then as democracy grows corruption decreases. The purpose of this paper is to examine the relationship between inequality and democracy in two directions, both the effect of democracy on inequality and the effect of inequality on democracy. It will help to establish a more direct link than explaining inequality indirectly through corruption. It follows from the existing literature on democratization and inequality that higher level of inequality brings decrease in democratization, since inequality increases the incentives of the elite class to limit the democractic rights of the rest of the population in order to avoid any uprisings. (Acemoglu, 2001) The causality may be thought to run from the other direction, too; that is, from the effect of democracy on inequality: Democracy first increases, then decreases corruption (Mohtadi and Roe, 2002) So, at the beginning, the increased corruption due to democratization would be expected to increase inequality (Gupta et al, 1998).Then at the later stages democracy lowers the inequality since it lowers corruption, rent seeking agents would be high in number and the average rent would decrease.