Trade, Institution Quality and Income Inequality

We examine the effect of trade on income inequality in small developing countries. We use two well-accepted trade cost variables for identification: one is based on Baltic Dry Index and another is commodities' price index. Our main finding is that trade leads to a significant reduction (increase) in income inequality in autocracies (democracies). To explain such different effects, we provide supporting evidence that autocracies export more primary commodities and may follow the Stolper-Samuelson theorem in HO framework, while democracies active in manufacturing outsourcing may follow Feenstra and Hanson (1996) task model.