The Impact of Oil Rents On Income Inequality: Does Fiscal Decentralization Matter?

Abstract

This paper explores the empirical effects of oil rents on income inequality and how the federal structure of a country influences this relationship. Although oil rents may help a country increase its nominal gross domestic product, at the same time, it may also increase income inequality. This paper uses panel data from more than 100 countries for the period 1996–2016 to find evidence that oil rents have a non-monotonic relationship with income inequality. Natural resource abundance may reduce income inequality in the short run but increase in the long run. This paper further tests the interaction effect of fiscal decentralization and oil rents on income inequality. Although fiscal decentralization is statistically insignificant, its interaction with oil rents is negative and significant. An interesting finding of the analysis is that the interaction of fiscal decentralization and oil rents eliminated the non-monotonic relationship between oil rents and income inequality.