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.