The effect of institutional factors on income inequality: An econometric analysis on selected countries

This study aims to analyze the impact of institutional factors on income inequality. For this purpose, panel data analysis was applied to 49 countries classified by income level, using annual data from the period 2002–2022. The Gini coefficient was used as the dependent variable to represent income inequality. Institutional quality was measured using two main sources: the World Bank's governance indicators (such as voice and accountability, political stability, government effectiveness, rule of law, and control of corruption) and sub-indices of economic freedom from the Heritage Foundation (including property rights, judicial effectiveness, business freedom, tax burden, etc.). In the analysis, macroeconomic indicators such as GDP per capita, R&D expenditures, public spending, tax revenues, unemployment, and inflation were included as control variables. While the existing literature predominantly focuses on governance indicators, this study offers a more comprehensive examination of institutional quality by incorporating both governance and economic freedom dimensions. This multidimensional approach provides a broader framework to explore the relationship between institutional structure and income inequality. Furthermore, conducting a comparative analysis based on countries' income groups and employing an extensive set of variables strengthen the empirical framework of the study. The findings reveal that institutional quality has a statistically significant effect on income inequality, particularly in low and lower-middle-income countries. Improvements in institutional indicators are found to reduce inequality, while deteriorations exacerbate it. These results highlight that institutional structure plays a critical role not only in economic performance but also in shaping the distribution of income.