Two essays in political economy (Friedrich A. von Hayek)

This dissertation empirically examines the determinants of income inequality and economic development based on the insights of F. A. Hayek. Chapter 1 empirically evaluates the effect of financial development on income inequality. Three theories of financial development—legal, political, and geographic theories—offer potential explanations of why financial development varies and, indirectly, why income inequality differs across the world. We assess each theory by instrumenting financial development with variables associated with each theory. We find only legal origins has an indirect impact on the level of income inequality through the development of financial markets. The exogenous component of financial development associated with legal origin has a robust negative relationship with income inequality. Neither political openness nor geography has an impact on income distribution through financial markets.; Chapter 2 examines the arguments of F. A. Hayek regarding why some nations are wealthy and others are not. He suggested that judicial independence and federalism provided the political and legal institutions necessary for economic development. These institutions provided the basis for good governance by providing the incentives for private and public individuals to refrain from predation. In order to examine this possibility, we employ two-stage least squares regressions. We instrument institutional quality and public goods provision with measures of judicial independence and federalism. We find that both the protection of property and the provision of public goods have a positive effect on economic development. The first stage regressions suggest that federalist societies better protect property rights and provide higher levels of public goods which increase income per capita while judicial independence has a mixed effect on economic development. Aspects of judicial independence improve the security of property but reduce the level of public goods provision. Overall, these findings provide an improved understanding of the legal and political institutional foundations of economic development.