Government Intervention, Institutional Quality, and Income Inequality: Evidence from Asia and the Pacific, 1988-2014

We examine the linear and nonlinear long-run relationship between public expenditure and institutional quality, and income inequality in Asia and the Pacific. By applying panel cointegration methods using a dataset from 1988 to 2014, our main findings suggest that public expenditure and institutional quality have negative long-run, steady-state effects on income inequality in Asia and the Pacific. The effect of institutional quality has only a one-way Granger causality link to income inequality. The existence of a nonlinear relationship between public expenditure and institutional factors linked to income inequality is also found. It implies that, at the early stage of institutional development, a country whose economy has experienced higher public expenditure generates rising income inequality; then, in the long run, when the country improves its institutional quality, higher public expenditure results in lower income inequality.

Automated summary

The study reveals that public expenditure and institutional quality have negative long-run, steady-state effects on income inequality in Asia and the Pacific, with institutional quality having a one-way Granger causality link to income inequality, and a nonlinear relationship existing between public expenditure and institutional factors.