Inequality and Fractionalization

We present evidence that ethnic fractionalization explains variations in per capita income, institutions, and schooling better than inequality. To do so, we identify instruments for ethnic fractionalization and inequality based on historical experience and geography. While simultaneously instrumenting for both variables, we find that ethnic fractionalization is negatively related to the level of income, schooling, and institutional quality, but inequality is not consistently related in a statistically significant way. If anything, the evidence suggests that inequality is positively related to economic development. We also show that previous results indicating negative effects of inequality may be inadvertently capturing the impact of ethnic fractionalization.