The Threshold Effects of Government Size on Income Inequality in Iran

Improving income distribution is one of the most important goals of policymakers. Therefore, identifying the effective factors on income distribution and how to influence them in order to improve income distribution is a very essential subject for policymakers. The aim of this paper is to investigate the nonlinear impact of government size on income distribution in the economy of Iran. To this end, a threshold regression has been used for estimating the effective factors of income distribution during 1974-i2012. The estimation results indicate that in small government size regime (when the government size is less than 0.367), increasing government size does not have a significant impact on income inequality but in large government size regime (when the government size is larger than 0.367), increasing government size increases income inequality. Based on the empirical results, in pursuance of improving income distribution in Iran, we suggest that Iran’s government should perform privatization policy or thoroughly execute the article 44 of the constitution more rigorously than it did before.