The Inequality and Growth Nexus: The Role of Institutions in Mitigating the Negative Effects of Income Inequality

Sammanfattning: The link between income inequality and economic growth has been a popular topic in the empirical research literature in the past decades. Despite that, a consensus is yet to emerge. This paper analyzes the effect of income inequality on economic growth and the role of institutions in mitigating potentially negative effects using a panel of 48 countries in the time-period 1977-2009, including a mixture of developed and developing countries. Using a fixed effects panel data threshold model, I find evidence of an overall negative effect of income inequality on economic growth. In addition, I identify a threshold level of institutional quality, where the negative effects of income inequality are partially mitigated when institutional quality is above this threshold. Adjusting the trimming percentage of the threshold model provides further evidence of the overall negative effect of inequality while splitting the sample into developed and developing countries do not yield any significant results.