Income Inequality and the Oil Curse: The Case of Oil-Rich Developing Countries

While most literature on natural resource curse highlight its effect on the growth rate and the level of income, this paper shifts the focus toward the effect of oil dependence on the distribution of income in oil-rich developing countries (includiong Iran and 18 other countries). Moreover, the paper studies the impact of institutional quality and the interaction effect of different institutional quality measures and oil dependence on the distribution of income over the period of 2000-2017. We estimate a set of panel data models using the Generalized Method of Moments (GMM) to address the endogeneity problem. We find that oil dependence leads to increasing income inequality. Furthermore, our findings highlight the role of human capital, increase in gross domestic product per capita, and institutional quality improvement in decreasing income inequality. These results are robust to the way the quality of institutions is measured. Moreover, we find a threshold level for institutional quality above which the oil curse vanishes. Our finding, hence, highlights the crucial role of institutional quality in offsetting the positive effect of oil dependence on income inequality.