ESSAYS ON INCOME INEQUALITY AND POVERTY REDUCTION

Worldwide, socioeconomic development has been very uneven. Alongside remarkable advances in human progress, there remain serious concerns of persistent poverty and heightened inequalities. The United Nations’ World Summit for Social Development, Copenhagen Declaration, Sustainable Development Goals (SDGs) have all expressed, renewed commitment to help eradicate poverty and inequality. The scientific and research community have argued that providing effective social policies that evaluate the scale of poverty and inequality are imperative for understanding their societal impacts. This dissertation focuses mainly on examining three empirical themes in the literature put into three manuscripts. The first chapter examined the impact of innovation and entrepreneurship on income inequality using longitudinal data from 2000 to 2016 for middle-and low-income countries (64) and high income countries (25). Evidence from the literature have shown that entrepreneurship and innovation are primary drivers of income inequality, particularly in the “Global North”. Given the nature of entrepreneurship and the pace of technological progress in the “Global South” and the lack of research focus in the literature, we investigated if spatial spillovers innovation and entrepreneurship impact income inequality in the same way they affect economic growth. We applied spatial panel regression models to address potential issues of spatial dependency among neighboring countries. Our findings show that entrepreneurship and innovation exhibit Tobler’s effect and their spillovers have direct impact on income inequality. The second chapter investigated if there is an institutional quality threshold effect on income distributions. In the literature, scholars have argued on institutional quality as a tool for socioeconomic development, but one question that comes into play, is how much institutional change is necessary and if it is indeed possible to identify a specific threshold level. Since institutional quality is fragile and varies across the world, we compare the level in developing countries with that of the developed world by employing a dynamic panel threshold model by Kremer et al., (2013) on longitudinal data from 1995 to 2017. We estimate the threshold and marginal impact for institutional quality and compare tresults on different measures of institutions. Our findings suggest that institutional quality and income inequality relationship varies with the measure of institutional quality. More specifically, we find two pronged results (i) For World Governance Indicators (WBGI) proxy, we find quadratic effect for advanced countries, but a monotonic negative effect for developing countries; (ii) For ICRG-based measure of institutional quality, we find a Kuznets inverted Ushaped relationship between institutions and income inequality for both advanced and developing countries. The results also show a higher threshold value for developing countries compared to advanced economies. The effect of the individual institutional indicators show that government effectiveness has strong effect on income inequality in developing countries while rule of law is important when it comes to the relationship between institutional quality and income inequality in advanced countries. The third chapter investigated the effect of financial development on poverty reduction in developing economies by assessing the sensitivity of financial development to the choice of financial development and poverty indicators. This is important for the finance-poverty literature considering the exclusion of non-formal financial institutions such as microfinance institutions from the measure of financial development. Tests based on a fixed effects 2SLS and dynamic panel estimation were used on a panel data of 49 developing countries from 2000 to 2017. We found significant support for the role of microfinance institutions on poverty reduction, while commercial banks do not induce non-monetary based poverty reduction. The multidimensional poverty index confirms the sensitivity of the effect of the choice of a financial development proxy. Further evidence using the social performance indicators of microfinance institutions revealed that only access to finance has poverty reducing effect. The following policy implications were deduced from the study. 1. Middle-and low-income countries should continue to explore/pursue inclusive technological advancements that have potential to promote productivity and economic growth in the long run. This said, technology sharing policies can be adopted to reduce the impact of market dominance or monopoly power attributed to intellectual property rights enforceability. This can help eliminate some of the societal injustices (income inequality) that have saddled technological advancement in the advanced countries. 2. To foster strong business and innovative economy, better institutional environment will be needed. Institutional framework poised toward zero tolerance for corruption, clientelism and favoritism can improve both the accessibility and use of needed resources to boost enterprise creation and hence, provide attractive job opportunities to move people out of poverty. 3. One possible solution to increase entrepreneurial activities while reducing inequality is for governments in developing countries to offer various schemes targeting the poor, especially preferential financing. Finance is a key ingredient that smoothen the wheels of production. As such providing accessibility to both small and medium enterprise alike could reduce the burden of poverty among the less privileged of the society who have entrepreneurial intentions. A look at the social performance policy of the microfinance institutions revealed that only access to finance, have strong poverty reducing impact. This said, tax holidays can be used to motivate both commercial and microfinance institutions to increase their outreach in poverty zones.