Analysis of the Effects of Democracy and Free Trade on Factor Earnings in Iran

The theory of comparative advantage based on the opportunity cost imply that international trade can shift the factors of production and Stalper-Samuelson's theory states that trade can be affected by factor prices. From one side, democracy can emphasize the importance of privatization and private sector and on the other hand, according to the middle voter theory, attention to the workforce importance. The purpose of this study is to analyze the effects of democracy and trade on the proportion of production factors in Iran during 1357-1397. The research method is using econometric models, GLS and GMM. The research results show that the effect of the degree of openness and FDI on the wage-to-interest ratio variable is positive and significant. The effect of democracy on the wage-to-interest rate variable is positive and significant too. Also the interactive effect of two indicators of democracy and degree of openness (or FDI) on the wage to interest rate is positive and significant. These results are consistent with Stalper-Samuelson's theory and empirical studies. JEL Classification: F16, J24, P16