Effect of Public Education Expenditure on Income Inequality in Low‐Income Countries: A Quantile Regression Approach

ABSTRACT This paper aims to analyse the distributional effects of public social expenditure. To this end, it explores the conditional effects of education expenditure on income inequality in 42 low‐income countries from 1998 to 2022. It is innovative compared to previous work in that it uses both a parametric method (instrumental variable method) and a semi‐parametric method (Smoothed Instrumental Variables Quantile Regression). The findings indicate that public expenditure on education exerts a substantial impact on income inequality, across all specified models. A notable observation is that this effect is more pronounced in countries exhibiting comparatively lower levels of inequality than in those demonstrating higher inequality. It is important to note that public expenditure per pupil has a significant inequality‐reducing effect only in unequal countries. The study suggests that increases in public education budgets can help mitigate income disparities in low‐income contexts. However, more targeted per‐pupil investments may be especially critical where inequality is most pronounced.