Income Inequality and Institutional Quality

Abstract

This paper examines the link between income inequality and institutional quality. Despite the emergence of a large literature, no common ground has been established on the link between the two variables. In other words, while some argue a certain level of inequality could trigger a transition towards higher institutional quality, others claim that there is no significant relationship between the two variables. Thus, this paper fills the gap in the literature by incorporating the role of culture, a variable that has long been ignored in this context. It therefore tests for whether the interaction between inequality and culture exists in shaping institutional quality. The results are shown to be robust to various specifications and different data sources.