Probing Institutional Quality Through Ethnic Diversity, Income Inequality and Public Spending

Abstract

Institutions play a vital role for smooth and sustained functioning of economies as well as to excel the living standard of economic agents but there is no consensus upon factors explaining the institutional quality. This study is an attempt of how ethnic diversity, income inequality and public spending are encompassed to affect the institutional quality, illustrated by the example of a developing country, Pakistan, applying ARDL approach covering time span of 1984–2015. It is found that ethnic diversity and income inequality are associated with deterioration of institutions and public spending is likely to improve them. Ethnic diversity has to be managed endogenously to avoid its adverse effects on institutions while there is dire need to squeeze the widening gap between rich and poor. The findings of the study reveal that public spending needs to be contribute more at present for building the institutional quality.