Governance and income inequality : A panel data analysis on the relationship between the quality of government and the Gini index

Abstract: This study investigates the relationship between quality of government and incomeinequality. The purpose of this study is to understand how differences in quality ofgovernment across states affect their income inequalities. By utilizing a theoreticalframework that incorporates Kuznets inverted U-hypothesis, quality of governmentand state capacity, this study argues that a high level of quality of government andstate capacity are essential for states to handle income inequality. The method usedwas a regression analysis using panel data that covers the time period from 1946to 2020. Furthermore, pooled OLS and fixed effects model were used to study therelationship. The results from the pooled OLS showcases that there’s a negativerelationship between quality of government and income inequality. However, whencontrolling for entities by using the fixed effects model the results show a positiverelationship. In addition, an F-test was conducted to find the regression model withthe best fit where the fixed effects model showcased a superior fit to the given dataused in the study. The study suggest that further research should be done on howincome inequality and governance differs depending on the historical onset of thecountries. Moreover, further research on how decentralization or centralization ofpower in a country affects income inequality is suggested.