The effect of institutional quality on income distribution in institutionally developed countries

Abstract

The research aims to measure the impact of institutional quality on income distribution in institutionally developed countries. The panel data method has been used for the period (2002-2018), for a group of countries that are characterized by the development of their institutions. Fixed effects model (FEM) was adopted to estimate the models included in the research. The regression of the three income shares (the richest 10%, middle 40%, and the poorest 40%) was performed as dependent variables within three models. The explanatory variables were represented by the indicators of institutions issued by the World Bank (political stability, control of corruption, government effectiveness, regulatory quality, rule of law, voice and accountability). The effect of other explanatory variables has been taken into consideration, such as government expenditure as a percent of gross domestic product, unemployment rate, and trade openness. The results showed that the response of the income distribution to institutional variables was weak, as all the calculated elasticities were less than one. However, it was found that institutional variables play a more important distributional role than economic variables. Also, it was found that the only institutional variable influencing the distribution of income in favor of the rich class is the control of corruption. While institutional variables that have a distributional effect in favor of the poor are government effectiveness, political stability, and the quality of regulations. The variables affecting the distribution of income in favor of the middle class were the effectiveness of the government, regulatory quality, and the rule of law. On the other hand, unemployment rate and trade openness had a negative impact on the income share of the poor, while the government expenditure rate, unemployment rate, and trade openness had a positive effect on the middle-class share; unemployment rate had a positive effect on the share of the rich class.