Institutions and Economic Inequalities: What Correlations and Causalities?

Résumé

Abstract:

This study investigates the complex relationship between institutional quality and economic inequality in Western European countries with strong institutional frameworks namely Germany, France, the Netherlands, and Sweden. While these nations are characterized by high levels of rule of law, government effectiveness, and control of corruption, they continue to experience persistent or rising levels of income and wealth inequality. Using an Autoregressive Distributed Lag (ARDL) econometric approach over the period 2010–2024, this research analyzes both the short-term and long-term dynamics between institutional indicators and post-tax, post-transfer Gini coefficients. The results reveal significant negative correlations between institutional quality and inequality, highlighting the role of legal integrity, administrative efficiency, and anti-corruption measures in fostering more equitable income distributions. The findings also show that rising unemployment is a strong predictor of increased inequality, underscoring the mediating role of labor markets. Policy implications emphasize the need for sustained institutional reform, particularly in transparency, redistributive capacity, and labor market inclusiveness. Overall, the study contributes to the empirical and theoretical literature by confirming the enduring impact of institutions on economic equity, while also stressing the importance of adaptability in the face of globalization and socio-economic shifts.

Keywords: Institutional Quality; Economic Inequality; Western Europe; ARDL Model; Rule of Law; Redistribution; Unemployment; Governance; Social Policy; Panel Data Analysis.