The impact of institutional quality on income distribution: An empirical analysis for developed and developing countries

The distribution of income among individuals that constitute society is another important thing as much as economic growth on social welfare aspect. Income distribution is directly linked to social peace and stability, sustainable economic growth and poverty as much as it is to social welfare. Because of this significance; the dynamics of income distribution have been studied by economists for years and various theories have been developed to explain the inequality of income distribution. However, it can be seen that most of these theories are not consider the role of institutions. Whereas, the institutions that manage economic and political processes affect individual incomes because of their affects on personal incentives and limiting the activities that individuals can undertake. In this context, the objective of this study is to investigate the impact of institutional quality on income distribution among developed and developing countries. For this purpose, the Gini coefficient is used as the indicator of income distribution and the institutional quality index which was formed with the help of the International Country Risk Guide, is used as the indicator of institutional structure in models. In addition, real income per capita and financial development index variables which are assumed to be closely related to income distribution in the literature are included in the models in order to avoid omitted-variable bias. The annual data covers 1988-2014 period that is used and recently developed panel data estimators such as CCEMG and System GMM are employed in this study. The findings obtained in the empirical analysis section can be listed as follows: i) An increase in institutional quality affects the Gini coefficient negatively in developed countries while affects positively in developing countries. ii) An increase in the financial development index affects the Gini coefficient positively in developed countries while affects negatively in developing countries. iii) An increase in real income per capita affects the Gini coefficient negatively in both developed and developing countries.