The recent debate on the causes and consequences of income inequality shows striking similarity to the debate in many parts of Europe before 1914. Today and back then the focus was on the role of capital share and market concentration as a cause for rising inequality. In this study we analyze the drivers and consequences of income inequality exploiting a newly constructed regional panel for the German Empire, 1874-1913. Our data features large variation in terms of inequality across 30 Prussian districts (Regierungsbezirke) and dynamic changes over time, both within the common institutional framework of the German Empire. Both, capital share and inequality are strongly associated with rising market concentration. Further, inequality had a strong effect on political polarization. However, in seeming contrast to modern results but in line with neoclassical political economy, income inequality in 19th century Germany was mainly linked to support for the political left, while the relationship with the political right is much weaker.
(with Nikolaus Wolf and Felix Kersting)