Governance for whom? The heterogeneous effects of institutional reforms in shaping income inequality

This paper examines the role of institutional quality on income inequality for emerging markets during the period 1996–2023. Employing a multi-dimensional measurement strategy – utilizing both the Gini coefficient and top income shares- this study aims to yield targeted policy implications for institutional reform. Also, to capture the different aspects of institutional quality we use 6 different indicators. The findings reveal that higher regulatory quality and voice and accountability are associated with a lower Gini coefficient, providing robust support for the opportunity equality hypothesis. On the other hand, government effectiveness significantly reduces the income share of the top 1%, corroborating the capture hypothesis by showing that improvements in these areas curb the income share of the wealthiest segment. Conversely, a positive relationship emerges between control of corruption, political stability, rule of law, and voice and accountability and the income share of the top 10%, lending support to the grease the wheels hypothesis, which posits that in weaker institutional settings, corruption and lack of control may inadvertently benefit the upper decile. Therefore, policymakers must move beyond generic governance agendas and instead design targeted interventions to reduce overall dispersion, curb the upper decile, or limit the accumulation at the economic elites.