Efficiency of institutions, political stability and income dynamics

In a simple theoretical framework, the quality of institutions affects individual investment decisions, and hence impacts income levels and distribution. When institutions deteriorate and inequalities increase, the incumbent undertakes redistributive taxation to maintain political support. The quality of institutions and the extent of redistribution depend on the degree of government responsiveness to citizens, and on the credibility of the political opposition to the incumbent. The econometric analysis is based on both single equation models and systems of equations. Good institutions are found to reduce the Gini coefficient and to increase average income, growth, and income of the poor. However, some non-linearities are detected in the institutions–Gini relationship