Economic growth and state income inequality in Mexico, 2005-2013: Luminosity geoindicator as an instrument for measuring GDP

Multiple studies have been conducted on inequality and economic growth. The stylized facts at the international and national level suggest a significant relationship between both variables, however, those studies are not conclusive; the latent endogeneity problem proposed in the models suggests possibly biased results. Based on [14], to overcome such bias, an instrument is proposed. Our instrument approximates economic growth through the night lights captured by satellite images that corrects the simultaneity problem in the model. With the application of a two-stage spatial durbin panel model, the spatio-temporal effect of the economic dynamics of the states on their levels of inequality is captured. The results show that there is a positive relationship between economic growth and inequality, which contrast previous contributions. Also, brightness as an instrument improves the estimation of the model. Finally, it is found that the optimal average economic growth rate reduces inequality in each state by about 2 percent.