Abstract:
Although the government adopted policy that geared toward mitigating Inequality, and poverty,
still income inequality remains a major challenging issue in the Ethiopia. There are limited
empirical research that shows how institutional quality influence income inequality in Ethiopia.
Therefore, this study aimed at filling this the gap which exist in the current state of research. To
this effect, the time serious data over 1980 to 2023 were sourced from IM, WB, and WIID. Using
ARDL model, this study shows that lagged income inequality, population growth, inflation, civil
liberties, political corruption, good governance quality, and investments have short-run influence
on income inequality. Income inequality shown to have self-perpetuation behavior, which
indicated by significant and positive (coefficient= 0.551) in its lagged time. At the same time, the
institutional quality like civil liberties and political corruption played significant role in
determining income inequality, both in the short and long run. In the short run, civil liberties
increased inequality, as it indicated by its first lagged effect (estimated coefficient = 0 .85) and
second lagged effect (estimated coefficient =1.52), while in the effect is persistence in the long run
(estimated coefficient =5.58). The implication is that civil liberty institutions are being poor and
weak fail to reduce inequality. Political corruption increased inequality in short run by 8.280482
units, in its lagged form and in the long run by 71.59032 units. Quality of governance reduced
inequality in the short run, in its first lagged form by 8.91 units and its second lag by 15.71 units.
The effect is also persistence in long where it reduces inequality by 33. units. However, the ECM
results show existence of complex effect of institutional quality variables on income equality,
reversing the result of short and long effect while the variables adjust itself toward long
equilibrium. Therefore, this study argues that institutional quality matter for income inequality
than standard macroeconomic variables. In the long run, institutional factors dominate
macroeconomic variables in creating effects with investment emerging as an important factor
through which inequality would be reduced. In addition, institutional quality found to have adverse
effect on income distribution and therefore recommends improving institutional quality in way that
it ensures equitable income distributions is important in Ethiopia.
