Factors Affecting Provincial Income Distribution Inequality in Iran: Using a Fractional Panel Probit Model

Abstract

The distribution of resources and potentials is of crucial importance in the regional economy, social justice, poverty reduction and economic growth and development. Thus, fair distribution of income is one of the most important concerns of policymakers and economic researchers. However, since the income distribution index (Gini coefficient) is limited to range between zero and one, the use of standard linear models may not measure accurately the effect of other variables on it. Therefore, this study attempts to identify the variables affecting income distribution in the provinces of Iran over the period 2005-2016 using a Fractional Panel Probit Model. This approach is able to estimate the average partial effects of dependent variables with fractional data ranging from zero to one. The results show that the relationship between economic growth and income distribution does not support the Kuznets’s hypothesis. Among the control variables, per capita government expenditure, financial development and inflation have negative and significant effects on the Gini coefficient. According to the findings, it is suggested that the government should implement policies to promote financial development and to increase the efficiency of financial instruments, as well as to invest on education and health in order to benefit all strata of society.

Keywords

• fractional panel probit model
• fractional response variables
• gini coefficient
• regional economy