Who values democracy?

A recent study explores the conventional belief that redistribution is a key component of democratization, utilizing data from stock markets. The research, consistent with this hypothesis, finds that democratizations have a significant negative impact on asset valuations due to an increase in redistribution risk. Across 90 countries over 200 years, risk premia are notably higher—similar to the magnitude experienced during financial crises—both before and during democratizations.

The study attributes this phenomenon to a shift in Catholic church doctrine supporting democracy, providing causal evidence that democratizations indeed lead to elevated risk premia. Successful democratizations result in substantial redistribution, with the public sector growing, income inequality decreasing, and the labor share of income rising. An extended version of the traditional redistribution-based model of democratization, incorporating asset prices, can quantitatively explain these effects.

The model suggests that reductions in inequality and increased taxes account for approximately half of the observed results. The remaining effects are attributed to increased economic competition and equality in government spending. Importantly, the model also explains the negligible asset pricing response to autocratizations. Neither macroeconomic risk nor generic political risk can account for these findings.

The research, authored by Max Miller, was published in the Journal of Political Economy (JPE) and is freely available online. The article discussing the findings is titled "Who values democracy?" and was initially published on Marginal REVOLUTION.