Factor Endowments, the Rule of Law & Structural Inequality: Testing the Engerman-Sokoloff Hypothesis

This paper provides an empirical test of the Engerman-Sokoloff hypothesis that factor endowments influenced the development of the rule of law, which in turn has shaped the income distribution. Using a measure of the suitability of land for growing wheat relative to sugarcane as an instrument for the rule of law, as measured by area 2 of the Economic Freedom of the World index, we estimate the potential causal impact of the rule of law on the long-run net income inequality. Conditioning on geography, ethnolinguistic fractionalization and legal tradition, the rule of law exerts a negative impact on inequality that is both economically and statistically significant. The results are robust to additional control variables, two alternative measures of the rule of law, an alternative instrumental variable, and the exclusion of strategic country samples and outliers.