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Does Inequality Lead to Wars? An Empirical Analysis Bachelors Thesis A D a.v.demin.hse@gmail.com Supervisor: A Z Consultant: E A National

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SLIDE 1

Does Inequality Lead to Wars? An Empirical Analysis

Bachelor’s Thesis A D

a.v.demin.hse@gmail.com

Supervisor: A Z Consultant: E A

National Research University Higher School of Economics (Moscow) May 31, 2018 Moscow

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SLIDE 2

Introduction

Outline

1

Introduction

2

Existing research

3

Formal Model

4

Data Analysis

5

Conclusion

Alexander Demin Does Inequality Lead to Wars? 1 / 34

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SLIDE 3

Introduction Motivation

Intuition

The decay of inter-state wars and the spread of civil wars are studied separately – significant gap Unprecedented increase of economic inequality prompts scholars to re-evaluate its effects on domestic economic and political development New mechanisms of accountability considerably alter the link between inequality and war decision

Alexander Demin Does Inequality Lead to Wars? 2 / 34

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SLIDE 4

Introduction Motivation

Intuition

The decay of inter-state wars and the spread of civil wars are studied separately – significant gap Unprecedented increase of economic inequality prompts scholars to re-evaluate its effects on domestic economic and political development New mechanisms of accountability considerably alter the link between inequality and war decision

Alexander Demin Does Inequality Lead to Wars? 2 / 34

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SLIDE 5

Introduction Motivation

Intuition

The decay of inter-state wars and the spread of civil wars are studied separately – significant gap Unprecedented increase of economic inequality prompts scholars to re-evaluate its effects on domestic economic and political development New mechanisms of accountability considerably alter the link between inequality and war decision

Alexander Demin Does Inequality Lead to Wars? 2 / 34

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SLIDE 6
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SLIDE 7
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SLIDE 8

Introduction Problem and Research Questions

Introduction

Problem

Problem: the interconnection between economic inequality and decision to wage an interstate war in various political regimes Research questions: How does economic inequality affect a state’s resolve to fight another state in a given period of time? How does accountability change the direction of this effect? Subject matter: the decision-making mechanisms in political systems with different regimes in the context of war decisions.

Alexander Demin Does Inequality Lead to Wars? 5 / 34

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Introduction Problem and Research Questions

Introduction

Objective and Research Tasks

The objective of the research is the apprehension of precise microeconomic mechanisms, through which inequality influences war-proneness of states. Main research tasks:

1

search for the already described mechanisms in the recent literature

2

develop a formal theoretical explanation of inequality, regime, and war connection

3

test theoretically driven hypotheses on the available data

Alexander Demin Does Inequality Lead to Wars? 6 / 34

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SLIDE 10

Introduction Methodology

Methodology and Methods

Methodology: rational choice theory. Methods:

1

Formal (game-theoretic) modeling

2

Pooled, fixed effects, random effects panel LPM ang Logit models

3

Dynamic multilevel Logit (ML and Bayesian estimation)

4

Pooled 2SLS LPM and Probit

5

Instrumental variable iterative GMM estimation

Alexander Demin Does Inequality Lead to Wars? 7 / 34

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SLIDE 11

Existing research

Outline

1

Introduction

2

Existing research

3

Formal Model

4

Data Analysis

5

Conclusion

Alexander Demin Does Inequality Lead to Wars? 8 / 34

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SLIDE 12

Existing research Basic Concepts

Building Blocks

Wars can be defined “as sustained, coordinated violence between political organizations” (J. Levy and Thompson, 2010, p.5) Economic inequality is an overall deviation from absolutely equal distribution of economic goods (mind multiple ideas of “equality”) (Cowell, 2011) Institutions as stable agents’ Nash-equilibrium strategies profiles (Hall and Taylor, 1996; Riker, 1980) Political regime is defined as an institutional arrangement for arriving at political decisions (Schumpeter, 1994)

Alexander Demin Does Inequality Lead to Wars? 9 / 34

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Existing research Economic Inequality, Political Regime, and Wars

International Wars, Destabilization, and Inequality

Diversionary theory and audience costs: debate on simple explanations for complex war decisions (Colaresi, 2007; Arena and Bak, 2015) After numerous arguments, economic inequality is said to be almost a definite impetus for internal destabilization (Alesina and Perotti, 1996; Boix, 2008; Baten and Mumme, 2013) Not only RATF: internal instability and interstate wars are linked through army size, inequality, and taxation (Acemoglu, Ticchi, and Vindigni, 2010) Inequality, wars, and accountability (Mattes and Rodríguez, 2014) in conjunction are heavily understudied formally and empirically (Grossman, 2002; Acemoglu and Robinson, 2004; Boix, 2008)

  • 1. Predominance of structural explanations and negligence of micro-level incentives
  • 2. Separation of rebellions and interstate war decisions

Alexander Demin Does Inequality Lead to Wars? 10 / 34

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Existing research Economic Inequality, Political Regime, and Wars

International Wars, Destabilization, and Inequality

Diversionary theory and audience costs: debate on simple explanations for complex war decisions (Colaresi, 2007; Arena and Bak, 2015) After numerous arguments, economic inequality is said to be almost a definite impetus for internal destabilization (Alesina and Perotti, 1996; Boix, 2008; Baten and Mumme, 2013) Not only RATF: internal instability and interstate wars are linked through army size, inequality, and taxation (Acemoglu, Ticchi, and Vindigni, 2010) Inequality, wars, and accountability (Mattes and Rodríguez, 2014) in conjunction are heavily understudied formally and empirically (Grossman, 2002; Acemoglu and Robinson, 2004; Boix, 2008)

  • 1. Predominance of structural explanations and negligence of micro-level incentives
  • 2. Separation of rebellions and interstate war decisions

Alexander Demin Does Inequality Lead to Wars? 10 / 34

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SLIDE 15

Existing research Economic Inequality, Political Regime, and Wars

International Wars, Destabilization, and Inequality

Diversionary theory and audience costs: debate on simple explanations for complex war decisions (Colaresi, 2007; Arena and Bak, 2015) After numerous arguments, economic inequality is said to be almost a definite impetus for internal destabilization (Alesina and Perotti, 1996; Boix, 2008; Baten and Mumme, 2013) Not only RATF: internal instability and interstate wars are linked through army size, inequality, and taxation (Acemoglu, Ticchi, and Vindigni, 2010) Inequality, wars, and accountability (Mattes and Rodríguez, 2014) in conjunction are heavily understudied formally and empirically (Grossman, 2002; Acemoglu and Robinson, 2004; Boix, 2008)

  • 1. Predominance of structural explanations and negligence of micro-level incentives
  • 2. Separation of rebellions and interstate war decisions

Alexander Demin Does Inequality Lead to Wars? 10 / 34

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SLIDE 16

Existing research Economic Inequality, Political Regime, and Wars

International Wars, Destabilization, and Inequality

Diversionary theory and audience costs: debate on simple explanations for complex war decisions (Colaresi, 2007; Arena and Bak, 2015) After numerous arguments, economic inequality is said to be almost a definite impetus for internal destabilization (Alesina and Perotti, 1996; Boix, 2008; Baten and Mumme, 2013) Not only RATF: internal instability and interstate wars are linked through army size, inequality, and taxation (Acemoglu, Ticchi, and Vindigni, 2010) Inequality, wars, and accountability (Mattes and Rodríguez, 2014) in conjunction are heavily understudied formally and empirically (Grossman, 2002; Acemoglu and Robinson, 2004; Boix, 2008)

  • 1. Predominance of structural explanations and negligence of micro-level incentives
  • 2. Separation of rebellions and interstate war decisions

Alexander Demin Does Inequality Lead to Wars? 10 / 34

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SLIDE 17

Existing research Economic Inequality, Political Regime, and Wars

International Wars, Destabilization, and Inequality

Diversionary theory and audience costs: debate on simple explanations for complex war decisions (Colaresi, 2007; Arena and Bak, 2015) After numerous arguments, economic inequality is said to be almost a definite impetus for internal destabilization (Alesina and Perotti, 1996; Boix, 2008; Baten and Mumme, 2013) Not only RATF: internal instability and interstate wars are linked through army size, inequality, and taxation (Acemoglu, Ticchi, and Vindigni, 2010) Inequality, wars, and accountability (Mattes and Rodríguez, 2014) in conjunction are heavily understudied formally and empirically (Grossman, 2002; Acemoglu and Robinson, 2004; Boix, 2008)

  • 1. Predominance of structural explanations and negligence of micro-level incentives
  • 2. Separation of rebellions and interstate war decisions

Alexander Demin Does Inequality Lead to Wars? 10 / 34

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SLIDE 18

Formal Model

Outline

1

Introduction

2

Existing research

3

Formal Model

4

Data Analysis

5

Conclusion

Alexander Demin Does Inequality Lead to Wars? 11 / 34

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Formal Model Setup

Basic Logic

The Rich decide whether to participate in war or not, considering the threat of rebellion This threat is contingent upon inequality level θ and costs for the Poor The decision to participate in war is not always credible because of accountability levels, so that the Rich will hold the promise only with probability p The Rich posses limited state coercive power α, which should be distributed between fighting external and internal enemies

Alexander Demin Does Inequality Lead to Wars? 12 / 34

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Formal Model Tree & Results

Game Tree and Payoffs

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SLIDE 21

Formal Model Tree & Results

Substantial Assumptions

(a) Probability of successful (for the Poor) rebellion linearly increases with growing state power spent on the interstate war (b) The expected value of war λ is relatively small (c) Rebellion is a contest for the whole (undamaged) national wealth (d) Successful rebellion eliminates the extra-value of winning a war (e) Costs for warfare are paid by the rich (wars as a type of expensive public good created by the political elite)

Alexander Demin Does Inequality Lead to Wars? 14 / 34

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SLIDE 22

Formal Model Tree & Results

Probability of War Decision vs. Inequality

Alexander Demin Does Inequality Lead to Wars? 15 / 34

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Formal Model Hypotheses

Implications of the Model

Hypothesis 1 (Non-Linearity) On average, economic inequality and war-proneness have non-linear relation in the form of inverse-U curve. Hypothesis 2 (Accountability effect) Regimes with lower accountability have different non-linear relation (U-curve) as compared to more accountable systems. Hypothesis 3 (Similarity) Under low levels of inequality the effect of the accountability on war-proneness is insignificant.

Alexander Demin Does Inequality Lead to Wars? 16 / 34

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SLIDE 24

Formal Model Hypotheses

Implications of the Model

Hypothesis 1 (Non-Linearity) On average, economic inequality and war-proneness have non-linear relation in the form of inverse-U curve. Hypothesis 2 (Accountability effect) Regimes with lower accountability have different non-linear relation (U-curve) as compared to more accountable systems. Hypothesis 3 (Similarity) Under low levels of inequality the effect of the accountability on war-proneness is insignificant.

Alexander Demin Does Inequality Lead to Wars? 16 / 34

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SLIDE 25

Formal Model Hypotheses

Implications of the Model

Hypothesis 1 (Non-Linearity) On average, economic inequality and war-proneness have non-linear relation in the form of inverse-U curve. Hypothesis 2 (Accountability effect) Regimes with lower accountability have different non-linear relation (U-curve) as compared to more accountable systems. Hypothesis 3 (Similarity) Under low levels of inequality the effect of the accountability on war-proneness is insignificant.

Alexander Demin Does Inequality Lead to Wars? 16 / 34

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SLIDE 26

Data Analysis

Outline

1

Introduction

2

Existing research

3

Formal Model

4

Data Analysis

5

Conclusion

Alexander Demin Does Inequality Lead to Wars? 17 / 34

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SLIDE 27

Data Analysis Data & Methods

Data Sources

Table: Main Data Sources Description

War-Proneness Inequality Accountability Controls Main Dataset Correlates of War SWIID V-Dem V-Dem∗, Maddison Project, UN Time 1816-2010 1960-2016 1830-2017 1830-2017 Description Several binary variables (depends on hostility) Bayesian aggregation

  • f pre- and

post-tax income GINI Accountability and different democracy indices Population, GDP per capita, GDP growth, political stability, Income from natural gas, etc. Robustness Clio WID, World Bank Polity 2 (enhanced Polity IV) Maddison Project, WB

Alexander Demin Does Inequality Lead to Wars? 18 / 34

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Data Analysis Data & Methods

War-Proneness Description (Space)

Alexander Demin Does Inequality Lead to Wars? 19 / 34

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Data Analysis Data & Methods

Inequality Description (Time)

Alexander Demin Does Inequality Lead to Wars? 20 / 34

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Data Analysis Data & Methods

Inequality Description (Space)

Alexander Demin Does Inequality Lead to Wars? 21 / 34

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Data Analysis Correlation

Dynamic Multilevel Logit Models (MLE)

(1) (2) (3) (4) Year 2.196∗∗ 2.930∗∗∗ 3.019∗∗∗ 3.122∗∗∗ (1.020) (1.067) (1.079) (1.161) Year2 −2.555∗∗∗ −2.719∗∗∗ −2.692∗∗∗ −2.876∗∗∗ (0.840) (0.863) (0.868) (0.912) GINI market (st) 0.242∗∗ 0.326∗∗ 0.364∗∗∗ (0.123) (0.128) (0.129) (GINI market (st))2 −0.166∗∗ −0.214∗∗ −0.174∗∗ (0.075) (0.091) (0.087) Accountability −0.629∗∗∗ −0.307∗∗∗ 0.329 (0.101) (0.118) (0.349) (GINI market (st)) × Acc −0.115 −0.140 (0.085) (0.085) (GINI market (st))2 × Acc −0.285∗∗∗ −0.269∗∗∗ (0.061) (0.061) σ(uj) 2.153 2.221 2.234 1.897 Observations 3,995 3,995 3,995 3,741 Notes:

∗∗∗Significant at the 1 percent level. ∗∗Significant at the 5 percent level. ∗Significant at the 10 percent level.

Alexander Demin Does Inequality Lead to Wars? 22 / 34

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Data Analysis Correlation

Dynamic Multilevel Logit Models (Bayesian)

Distributions (I)

Alexander Demin Does Inequality Lead to Wars? 23 / 34

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SLIDE 33

Data Analysis Correlation

Dynamic Multilevel Logit Models (Bayesian)

Distributions (II)

Alexander Demin Does Inequality Lead to Wars? 24 / 34

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Data Analysis Causality

IV-ITGMM for LPM and Logit

LPM Logit (1) (2) (3) (4) (5) GINI market (st) 0.005 −0.010 0.011 0.005 −0.037 (0.011) (0.016) (0.021) (0.090) (0.148) (GINI market (st))2 −0.070∗∗∗ −0.027∗∗ −0.037∗∗∗ −0.135∗ 0.136 (0.009) (0.014) (0.014) (0.077) (0.109) Accountability −0.048∗∗∗ −0.014 −0.103 (0.004) (0.021) (0.089) Accountability (dummy) 0.040 (0.203) (GINI market (st)) × Acc 0.029 0.019 0.024 (0.022) (0.091) (0.177) (GINI market (st))2 × Acc −0.023 −0.145∗∗ −0.366∗∗∗ (0.018) (0.072) (0.137) Observations 3,837 3,837 3,837 3,837 3,837 Notes:

∗∗∗Significant at the 1 percent level. ∗∗Significant at the 5 percent level. ∗Significant at the 10 percent level.

Alexander Demin Does Inequality Lead to Wars? 25 / 34

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SLIDE 35

Conclusion

Outline

1

Introduction

2

Existing research

3

Formal Model

4

Data Analysis

5

Conclusion

Alexander Demin Does Inequality Lead to Wars? 26 / 34

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SLIDE 36

Conclusion

Final Results

1

On average, inequality leads to greater war-proneness, but in the form of inverse-U relation

2

This non-linearity changes for less accountable regimes, indicating their domestic fragility under medium level of inequality

3

Economic inequality, as a powerful explanation for internal instabilities, also influences the desire to participate in an international war

4

More extensive vision than exists in the literature (diversionary war and grief vs. grievance debates)

Alexander Demin Does Inequality Lead to Wars? 27 / 34

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SLIDE 37

Conclusion

Final Results

1

On average, inequality leads to greater war-proneness, but in the form of inverse-U relation

2

This non-linearity changes for less accountable regimes, indicating their domestic fragility under medium level of inequality

3

Economic inequality, as a powerful explanation for internal instabilities, also influences the desire to participate in an international war

4

More extensive vision than exists in the literature (diversionary war and grief vs. grievance debates)

Alexander Demin Does Inequality Lead to Wars? 27 / 34

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SLIDE 38

Conclusion

Final Results

1

On average, inequality leads to greater war-proneness, but in the form of inverse-U relation

2

This non-linearity changes for less accountable regimes, indicating their domestic fragility under medium level of inequality

3

Economic inequality, as a powerful explanation for internal instabilities, also influences the desire to participate in an international war

4

More extensive vision than exists in the literature (diversionary war and grief vs. grievance debates)

Alexander Demin Does Inequality Lead to Wars? 27 / 34

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SLIDE 39

Conclusion

Final Results

1

On average, inequality leads to greater war-proneness, but in the form of inverse-U relation

2

This non-linearity changes for less accountable regimes, indicating their domestic fragility under medium level of inequality

3

Economic inequality, as a powerful explanation for internal instabilities, also influences the desire to participate in an international war

4

More extensive vision than exists in the literature (diversionary war and grief vs. grievance debates)

Alexander Demin Does Inequality Lead to Wars? 27 / 34

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SLIDE 40

Conclusion

Theoretical Prediction

Alexander Demin Does Inequality Lead to Wars? 28 / 34

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SLIDE 41

Conclusion

Empirical Facts

Alexander Demin Does Inequality Lead to Wars? 29 / 34

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Conclusion

Thank you for your attention! Does Inequality Lead to Wars? An Empirical Analysis

A D

a.v.demin.hse@gmail.com National Research University Higher School of Economics (Moscow) May 31, 2018 Moscow

Alexander Demin Does Inequality Lead to Wars? 30 / 34

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Appendix

The Model: Parameter Description

θ δ¯

y (

1−θ 1−δ¯

y ) – personal elite (population) income, where θ ∈ [δ, 1] is the elite share of the gross income α ∈ [0, 1] – state coercive power spent on interstate war λ ∈ (0, 1] – expected extra-value of war p ∈ [0, 1] – accountability parameter (credibility of decisions/promises) cr ∈ (0, 1] – exogenous rebellion costs for the population

Alexander Demin Does Inequality Lead to Wars? 31 / 34

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SLIDE 44

Appendix

Descriptive Statistics

n mean sd median min max range skew kurtosis war.bin.use 4062.00 0.22 0.42 0.00 0.00 1.00 1.00 1.32

  • 0.25

war.bin.thr 4062.00 0.30 0.46 0.00 0.00 1.00 1.00 0.86

  • 1.26

gini.disp 4062.00 37.85 8.91 37.40 19.90 61.00 41.10 0.15

  • 0.69

gini.mkt 4062.00 45.26 6.81 45.15 21.20 68.50 47.30 0.21 0.63 v2x.account 4062.00 0.67 0.90 0.77

  • 1.61

2.17 3.78

  • 0.32
  • 1.06

v2x.poly 4058.00 0.53 0.28 0.53 0.02 0.93 0.91

  • 0.06
  • 1.51

v2x.libdem 4058.00 0.42 0.28 0.35 0.01 0.89 0.88 0.24

  • 1.49

mi.gdpgro 3744.00 0.03 0.07 0.03

  • 0.53

0.49 1.02

  • 0.44

8.15 mi.gdpln 3763.00 8.79 1.13 8.87 6.10 11.88 5.78

  • 0.11
  • 0.94

un.popul 4062.00 9.49 1.56 9.36 5.53 14.12 8.60 0.12 0.18 v2.svter 4043.00 93.10 8.68 96.33 35.83 100.00 64.17

  • 2.03

5.24

Table: Descriptive statistics

Alexander Demin Does Inequality Lead to Wars? 32 / 34

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SLIDE 45

Appendix

Dynamic Multilevel Logit Models (Bayesian) – Quantiles

2.5% 25% 50% 75% 97.5% Year 0.72 2.11 2.78 3.39 4.62 Year2

  • 4.36
  • 3.38
  • 2.86
  • 2.32
  • 1.20

GINI market (st) 0.12 0.28 0.36 0.44 0.61 (GINI market (st))2

  • 0.40
  • 0.29
  • 0.23
  • 0.17
  • 0.07

Accountability

  • 4.56
  • 2.26
  • 1.63
  • 0.58

2.26 (GINI market (st)) times Acc

  • 0.36
  • 0.28
  • 0.24
  • 0.20
  • 0.13

(GINI market (st))2 times Acc

  • 0.25
  • 0.14
  • 0.09
  • 0.04

0.06 GDP growth

  • 2.11

0.66 1.77 2.44 4.58 Population 0.69 0.92 1.06 1.18 1.43 Territory sovrgn.

  • 1.21
  • 0.75
  • 0.51
  • 0.27

0.16 µ(uj)

  • 3.01
  • 2.52
  • 2.29
  • 2.03
  • 1.53

σ(uj) 1.63 1.81 1.92 2.05 2.33

Alexander Demin Does Inequality Lead to Wars? 33 / 34

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SLIDE 46

Appendix

Causality: 2SLS for LPM and Probit

LPM Probit (1) (2) (3) (4) (5) GINI market (st) −0.019∗∗∗ −0.006∗∗∗ 0.013∗∗∗ −0.014 −0.025 (−0.000) (−0.000) (0.000) (0.025) (0.041) (GINI market (st))2 −0.034∗∗∗ −0.038∗∗∗ −0.191∗∗∗ (−0.000) (−0.000) (0.035) Accountability −0.011∗∗∗ (0.000) (GINI market (st)) × Acc 0.030∗∗∗ (−0.000) (GINI market (st))2 × Acc −0.026∗∗∗ (0.000) Observations 3,841 3,841 3,706 3,841 3,841 Notes:

∗∗∗Significant at the 1 percent level. ∗∗Significant at the 5 percent level. ∗Significant at the 10 percent level.

Alexander Demin Does Inequality Lead to Wars? 34 / 34