The Role of Efficiency of Redistributive Institutions on Redistribution: An Empirical Assessment

In spite of both theoretical and empirical contributions to investigate the determinants of redistribution, an important gap remains in the literature, which is the effect of efficiency of redistributive institutions on redistribution. This paper is an attempt to show that the state apparatus with its redistributive institutions plays a major role in determining the size of redistribution. Redistribution is mainly approximated with social security and welfare expenditures by the governments. We utilize the indices of ‘Quality of Bureaucracy’ and ‘Control of Corruption’ from the International Country Risk Guide to quantify efficiency of redistributive institutions. When measures of ERI are incorporated into the existing empirical specifications of income inequality and redistribution, cross-sectional and panel data regressions show that ERI significantly increases redistribution. This result is robust to alternative specifications of the empirical model as well as to alternative data sets. However, we find weaker evidence for the role of income inequality on redistribution. Income inequality does not appear to be strongly significant in various specifications of the redistribution equation. Based on this evidence, this paper concludes that efficiency of redistributive institutions plays an important role in redistribution but this effect does not resolve the fiscal policy puzzle.