A novel explanation for growing inequality? Exploring the effect of Special-Interest Groups

The debate on inequality determinants has mostly focused on economic factors. Yet there is no consensus in the literature on the underlying causes of income inequality. However, an increasing number of scholars argue that income inequality is related to institutional and cultural factors, as well as economic ones. In particular, case-studies reveal that fiscal policy is affected by pressure groups in advanced economies. On this premise, I rely on Mancur Olson (1965)’s theories on the effect of group activities on economic performance to explore the possible link between the number of special-interest groups (SIGs) in a country and its income inequality. The focus of this study is on long-run determinants of income inequality. Thus, assuming incomplete group formation, this dissertation tests whether the number of SIGs in a country is related with the value of its income inequality as expressed by the Gini index. The adopted methodology consists in a panel fixed-effect regression on a sample of observations on 48 countries in the period 1985-2005. The results provide a new understanding about income inequality determinants, by identifying a non-linear relationship between the number of SIGs and income inequality. The paper provides as well an exploration on a possible source of heterogeneity of the SIGs effect on inequality, identified in the level of GDP per capita.