A Dynamic Analysis of Economic Freedom and Income Inequality in the 50 U.S. States: Empirical Evidence of a Parabolic Relationship
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This paper examines the dynamic relationship between economic freedom and income
inequality in the fifty U.S. states over the 1979-2004 period. Using fixed effects regression
analysis, we find evidence that increases in economic freedom are associated with lower
income inequality, but the dynamic relationship between the two variables depends on the
initial level of economic freedom. This suggests that there may be an inverted U-shaped
relationship between economic freedom and income inequality. The inflection point at
which additional increases to economic freedom in a state result in less income inequality is
estimated. The results are robust to various time periods and several alternative measures of
income inequality.